New York May Become Latest Hostile Jurisdiction in Ever Changing Non-Compete Landscape

In a development concerning many of our clients, New York appears positioned to become the latest governmental entity taking action to curtail usage of the increasingly controversial restrictive covenants. 

This latest attack on the use of non-competes in New York comes on the heels of a flurry of activity over the opening months of 2023 intended to chill the use of restrictive covenants, including (i) the FTC’s notice of its intention to propose a ban on non-competes, (ii) the NLRB’s General Counsel issuing a memorandum expressing her opinion that certain non-competes violate the National Labor Relations Act, and (iii) Minnesota’s banning of non-competes.

With respect to New York, on June 7, the New York Senate passed Senate Bill S3100A (“the Non-Compete Bill”), which would ban post-employment non-competes entirely, as well as Senate Bill S6748, a proposed antitrust bill which would seek to include non-competes within its ambit by, inter alia, classifying them as unfair methods of competition. The New York Senate passed both bills, and they are headed to the New York State Assembly. Bill S6748 was referred to the Economic Development Committee, delaying it for now, but the Non-Compete Bill moved forward.

On June 20, 2023, the New York State Assembly met at a special assembly session to consider the Non-Compete Bill (then coded A1278B), which passed by a 95-to-49 vote. The fate of the Bill will next be decided at Governor Kathy Hochul’s desk, where she may sign, veto, revise, or fail to act upon it.

Should Governor Hochul decide to sign the Non-Compete Bill in its current form, it will amend the New York Labor Law by adding a new section, Section 191-d, and will go into effect 30 days after her signature. Critically, as presently drafted, it will not apply retroactively to previously executed non-compete agreements.

Though it remains to be seen if Governor Hochul will accept the Non-Compete Bill in its current form, the bill’s existing language is notable in what seem to be significant flaws in its drafting – including as to its breadth and vagueness – such that it is likely to precipitate litigation regarding the scope of its prohibition on “seek[ing], require[ing], demand[ing], or accept[ing] a non-compete agreement from any covered individual.”

The following two definitions taken from the current iteration of the Non-Compete Bill are key to understanding its potential impact should Governor Hochul sign it in its current form:

• Non-compete agreements are defined as “any agreement, or clause . . . between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer . . .”, except that contracts for a fixed term of service, confidentiality agreements, and customer non-solicitation agreements are arguably excluded, as discussed further below.
• Covered individuals are defined as any “person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.” This generally applies across industries including broadcasting, except that in recognition of existing law, the invalidation of any part of this bill would result in broadcast employees returning to existing coverage under section 202-k of the New York Labor Law.

With those broad and vague definitions serving as a backdrop, several of the more pressing aspects of the law are addressed in brief below:

• Prospective Effect: As currently written, the Non-Compete Bill appears to apply only prospectively, not retroactively. By contrast, if the related antitrust bill S6748 which is currently pending in committee were to be passed, it would effectively ban non-compete agreements with retroactive effect. Accordingly, we are closely watching developments as to this point.
• Non-Solicitation: The Non-Compete Bill carves out non-solicitation provisions, saying that they are not affirmatively prohibited provided that the excluded customers are those that the covered individual “learned about during employment.” In other words, it allows for a limited non-solicitation based on certain circumstances; however, the bill also goes on to state that any such non-solicitation agreement would be void if it “otherwise restrict[s] competition in violation of this section.” This language is likely to become a flashpoint for litigation if signed into law, particularly surrounding the meaning of “learned about” and the significance of the clause “does not otherwise restrict competition.” Even if customer non-solicitation clauses are entirely upheld against these challenges, courts may use the existing reasonableness test under New York law to limit the impact of expansive non-solicitation clauses. By contrast, employee non-solicitation clauses are not explicitly addressed in the carve-out from the Non-Compete Bill, providing no guidance as to whether they are permissible or entirely prohibited.
• Non-Disclosure: Non-disclosure agreements are permissible to prevent the disclosure of trade secrets and confidential or proprietary information, but, like customer non-solicitation clauses under the Non-Compete Bill, they cannot “otherwise restrict competition.” It seems reasonably likely that while typical protections against misappropriation of trade secrets and confidential or proprietary information would be permissible (and arguably must be permissible under the federal Defend Trade Secrets Act), it is unclear whether extending these protections into an argument prohibiting employment on the basis of inevitable disclosure would be viable.
• Sale of a Business: The Non-Compete Bill does not explicitly contain any carve-outs for the sale of a business. The validity of such covenants may turn on whether the seller meets the definition of “covered individual,” but the law is unclear as written. Of course, the sale of a business is widely accepted as one of the moments where non-competition, non-solicitation, and other restrictive covenants are most commonly and broadly enforceable, so the failure to address this concern only further underscores the lack of practicality in the drafting of the current version of the law.
• Private Right of Action and Timing of Suit: Covered individuals have a private right of action to bring civil enforcement actions against any employer who requests their signature upon a non-compete agreement within two years of: (i) the date the non-compete agreement was signed; (ii) the employee’s discovery of the non-compete; (iii) the employment relationship ends; or (iv) an employer takes any step toward enforcement of the non-compete against the employee.
• Remedies: Remedies include liquidated damages (up to $10,000) per covered individual, as well as voiding the non-compete agreement(s), enjoining attempted enforcement action, and awarding lost compensation, damages, and attorneys’ fees and costs.
• Class Action Risk: Unlike the antitrust bill, the Non-Compete Bill does not specifically address whether class actions under the proposed law may be viable. But, because the Non-Compete Bill appears that it may provide for a private right of action, attorneys’ fees, and liquidated damages “to every covered individual affected” without a correspondingly obvious requirement to show individualized harm beyond the existence of a non-compete agreement, it is unclear whether the current form of this legislation could become an attractive target for class action plaintiffs’ attorneys.
• Garden Leave: The Non-Compete Bill only prohibits post-termination non-competes, raising the possibility that well-drafted garden leave and/or notice provisions that would be deemed to extend an employee’s status as employed may be exempt from the reach of the Non-Compete Bill. Employers should carefully consider this option for key personnel should the Non-Compete Bill be signed into law.
• Independent Contractors: Though other considerations may also weigh against providing independent contractors with a non-compete, the language contained in this bill indicates that independent contractors would be included in the non-compete ban, and raises concerns relating to non-solicitation provisions that would commonly be used when engaging contractors. However, nothing in the law expressly prohibits establishing a “fixed term of service,” such as those sometimes seen in independent contractor agreements.
• Governing Law: As written, the Non-Compete Bill does not currently appear to prevent employers from taking action to attempt to avoid the application of New York law, as states such as California and Massachusetts have taken affirmative steps to prohibit, even where there is a meaningful connection in the employee-employer relationship to another jurisdiction. Given the various risks posed by the Non-Compete Bill, employers should carefully consider their choice of law and venue language.

If Governor Hochul recommends changes to the law to avoid any of the implications of the above, instead of outright rejecting or accepting the bill, it is likely that the new version would not take effect before 2024. Regardless of her ultimate approach, we are closely monitoring these developments and are available to assist employers regarding their restrictive covenant agreements in New York and beyond.