Did the First Case to Cite Minnesota’s Non-Compete Ban Hint at a Loophole?

Case overview

Minnesota’s statutory ban on non-compete agreements just went into effect on July 1, 2023, but already there is a case hinting at a potentially significant loophole. 

In Cookie Dough Bliss Franchising, LLC v. Feed Your Soul Minnesota, LLC, the court addressed the enforceability of a non-compete provision in a Franchise Agreement governed by Minnesota law. This appears to be the first case to cite Minnesota’s new non-compete statute. (It’s unclear how franchise relationships fit into the new statute, but that’s an issue for another day.)

In a footnote, the court held the statute did not apply for two reasons: (1) the parties signed the Franchise Agreement before the law’s effective date, and (2) “the legislative changes include an exception for agreements ‘designed to protect trade secrets or confidential information.’” 

By spelling out this second reason, the court seemed to suggest that even if the Franchise Agreement were signed after the effective date, the statute still would not apply because the Franchise Agreement fit into the exception for agreements “designed to protect trade secrets or confidential information.” 

What is an “agreement designed to protect trade secrets or confidential information”?

Let’s take a step back and examine the potential implications of the court’s interpretation. 

The statute defines “covenant not to compete” as “an agreement between an employee and employer that restricts the employee, after termination of the employment, from performing: (1) work for another employer for a specified period of time; (2) work in a specified geographical area; or (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement.” Minn. Stat. § 181.988(a).

But the legislature included several exceptions to this definition. The exception relevant here states: “A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information.” (Emphasis added.)

Here’s the key issue. What is an “agreement designed to protect trade secrets or confidential information”? Is it essentially the same as a “nondisclosure agreement,” or is it something else? 

Keep in mind the rule against surplusage, which advises courts to “avoid interpretations that would render a word or phrase superfluous, void, or insignificant, thereby ensuring each word in a statute is given effect.” Hagen v. Steven Scott Management, Inc., 963 N.W.2d 164, 170 (Minn. 2021). Applying this canon, an “agreement designed to protect trade secrets or confidential information” must be something different from a “nondisclosure agreement,” otherwise the legislature repeats itself. 

The court in Cookie Dough seemed to follow this reasoning by concluding the Franchise Agreement was an “agreement designed to protect trade secrets or confidential information.” That makes sense. The franchisor in Cookie Dough allegedly provided recipes and trade secrets to the franchisees, which it protected with the Franchise Agreement.

But the Franchise Agreement also contained a non-compete provision. If the court is suggesting a non-compete provision can escape the statutory ban if it is included in an agreement that, at least in part, is “designed to protect trade secrets or confidential information,” that is a significant development.

Could some non-competes fit within the exception?

What other agreements, besides “nondisclosure agreements,” are “designed to protect trade secrets or confidential information?” Well, non-competes. 

Before the legislature passed this new statute, Minnesota courts recognized, along with the vast majority of states in the country, that protecting trade secrets and confidential information is a legitimate business interest justifying reasonable non-compete agreements. See, e.g., Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 456 (Minn. Ct. App. 2001) (“[R]estrictive covenants are enforced to the extent reasonably necessary to protect legitimate business interests. Legitimate interests that may be protected include the company’s goodwill, trade secrets, and confidential information.”)

Fairly recently, one court even recognized the legitimacy of protecting confidential information with both non-disclosure and non-compete provisions. Medtronic, Inc. v. Sherland, No. A18-0579 (Minn. Ct. App. Dec. 24, 2018) (unpublished) (“The existence of a nondisclosure covenant does not preclude a noncompetition covenant from also protecting an employer’s legitimate interest in its confidential information.”). 

Is the Minnesota statute truly a “ban” on non-competes?

Many employers can prove in good faith that their non-compete agreements, particularly with high-level executives, are “designed to protect trade secrets or confidential information.”

There is an argument, then, with at least some support in the statute’s plain language and the Cookie Dough decision, that such agreements are excluded from the statutory prohibition. An “agreement designed to protect trade secrets or confidential information” is not a “covenant not to compete,” as defined in the statute.

This would mean the statute is a ban on some, but not all, non-competes. The prohibition would not apply to non-compete agreements “designed to protect trade secrets or confidential information,” but would apply to non-competes designed to protect any other interests, such as customer goodwill or investment in extraordinary training expenses. 

Arguments to the contrary

There are certainly strong arguments against this reading. It seems highly unlikely the legislature intended to create such a broad exception to a law publicly billed as a total non-compete “ban.” The title of the law, “Covenants Not to Compete Void in Employment Agreements,” suggests a total ban.

The structure of the statute also cuts against this interpretation. In the exceptions, the legislature is excluding other types of provisions from the general concept of a non-compete provision. Courts may decide that an “agreement designed to protect trade secrets or confidential information” is just another way of describing non-disclosure, return of property, or confidentiality provisions, nothing more.

If the statutory language were deemed ambiguous, it would be appropriate to take the legislative history and purpose of the law into account, which would likely support a total ban.

Finally, the Cookie Dough court’s analysis of the issue is far from robust, and its reference to the statutory exception may be considered obiter dictum.

Conclusion

There is an argument that the Minnesota non-compete “ban” is not as strict as it seems. There are arguments to the contrary. Regardless of which has the better footing, I suspect this won’t be the last case to address the issue. We will continue to monitor cases and provide daily updates and insights in the Daily Rundown to Blue Pencil Box subscribers.