Minnesota Moves to Make Its Laws Mirror New FTC Rule on Non-Competes

Sometimes we hear from real lawyers.  Brendan Kenny, a Minnesota attorney, reached out to let us know that his colleague, Mary Ellen Reihsen had written up a short piece on Minnesota's newly-adopted statute, § 181.9881, barring non-solicitation agreements in service agreements with customers.

In 2023, Minnesota adopted a fairly comprehensive ban on non-competes. Then, following the adopting of the new FTC rule, discussed here, they expanded the statute to sync Minnesota law with federal law.  The revision is set to go into effect next month, but Ms. Reihsen reports that business groups are seeking to narrow the rule.

The heart of the new statute reads as follows:

Restrictive employment covenants; void and unenforceable.

(a) No service provider may restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.

(b) Any provision of an existing contract that violates paragraph (a) is void and unenforceable.

(c) When a provision in an existing contract violates this section, the service provider must provide notice to their employees of this section and the restrictive covenant in the existing contract that violates this section.

The statute provides for one carve out relating to computer software development services.  I wish I knew the lobblying story behind that bespoke exception.

Ms. Reihsen provides some great examples to illustrate whey this rule is important.  Perhaps you use a service to provide you with home health aids, cleaning services, 0r office temps.  You may like the person you've hired, and they may confide in you that half of what you pay them goes to their employers, not to them.  You decide to cut out the middleman and hire them directly.  They make 25% more; you pay 25% less. Service providers used to be able to prohibit their customers from suggesting such an arrangement, but as of July 1st, they will no longer be able to do so.

Ms. Reihsen's short piece begins by stating that the new law "will create uncertainty among employers." I don't know.  The new law seems pretty clear.  The law has allowed certain anti-competitive practices for decades.  Now it doesn't.

Uncertainty may still arise in the form of law suits. As we noted, the FTC rule is already subject to multi-pronged challenges. If the business interests affected by the new law are not successful in amending the law to narrow its scope, we may see litigation on the state level as well, but I'm not sure what legal theories are available.  The federal litigation is about the separation of powers: major questions doctrine, non-delegation doctrine, Article II's vesting clause.  But here the action is by a state legislature.  The new law is intended to have retroactive effect, but still a Contracts Clause claim would be a stretch.