New York’s Bill Banning Noncompetes
Following the Federal Trade Commission’s (FTC) proposed ban on noncompetes and the General Counsel of the National Labor Relations Board’s internal memo opining that most noncompetes violate the National Labor Relations Act, several states have enacted legislation curtailing or banning noncompetes entirely. New York is likely the next.
On June 20, 2023, New York State passed a bill banning noncompete agreements. Employers in New York have relied on noncompetes for the protection of goodwill, client relationships, and confidential and/or proprietary information (among other things). If finalized, New York’s law would overturn centuries-old jurisprudence in one fell-swoop and may become the broadest ban in the country.
As of the date of this Note, the bill has not yet been sent to Governor Hochul for signature. While the Governor has declared support of a ban of noncompetes, she has advocated for eliminating them for workers earning below the median wage. With the overwhelming 95-52 vote in favor of the bill by the Assembly, many expect Governor Hochul to sign. Once signed, the bill will become law 30 days after the date of her signature. If Governor Hochul negotiates amendments to the bill, the effective date would likely be extended.
What is Prohibited?
The bill’s plain language is generally limited to prohibiting noncompetition following the conclusion of an employment (or similar) relationship. It defines a noncompete as an 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...” (emphasis added). A "covered individual” is defined very broadly to include someone who is in a position of economic dependence on the other, which seems intended to include independent contractors and consultants. However, the bill also contains an even broader prohibition, unlimited to post-employment, stating that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Section 3). Thus, the scope and breadth of the prohibition on noncompetes is less than clear.
Confidentiality and Client Nonsolicitations are Generally Not Banned
The bill specifically states that it does not prevent agreements prohibiting disclosure of confidential or proprietary client information. Likewise, it does not prohibit client nonsolicitation clauses or agreements. Each exception, however, is subject to the proviso that the permitted provisions do not otherwise restrict competition in violation of the bill.
Several Open Questions Remain. The bill leaves many items unaddressed and therefore, a significant amount of uncertainty persists. A discussion of some unanswered questions follows.
1. Is there a Sale of Business Exception?
The bill is silent regarding noncompetes in a sale of business context, neither expressly providing a carve-out for, nor banning noncompetes following the sale of a business or similar corporate transactions. While much of the bill, including the definition of a “noncompete” is limited to the post-employment (or similar relationship) context, it also voids every contract that restrains people from engaging in a lawful business or trade. Notably, however, this language is identical to California’s statute, which broadly bans noncompetes in the employment context, but permits them following the sale of a business.
Additionally, the FTC’s proposed ban expressly carved-out a sale of business exception.. The legislative history demonstrates the lawmakers’ intent to codify the FTC’s proposed ban in NY state law. These lend support for interpreting the bill in such a way that noncompetes following a sale of a business are not prohibited, but it is an area that needs clarification.
2. Are “de facto” Noncompetes Banned?
Unlike the FTC’s proposed ban, the bill does not expressly discuss or mention “de facto” noncompetes. Rather, Section 5 only provides that confidentiality and client nonsolicitation clauses are permissible as long as they do not otherwise restrict competition in violation of the bill. It does not mention other clauses that could have the same effect. For example, employee nonsolicitation, and even nonhire agreements, may prevent companies from hiring certain workers, which has the effect of restricting competition in violation of the bill.
3. Is Employee Choice Doctrine Dead?
Unlike preventing a worker from working for a competing business, courts in New York have long held that, where the remedy is forfeiture or claw back of deferred compensation, the noncompetes are more enforceable. This is known as the “employee choice doctrine.” Thus, when an employee can choose between retaining deferred compensation in exchange for not competing, or losing the compensation for competing, the noncompete’s enforceability is not judged by the same reasonableness standard and the noncompete is upheld. Many companies defer substantial portions of compensation for a variety of reasons, and they will not want to continue making payments to former employees who are now competing with them.
4. Is Garden Leave or an Employee Notice Provision Permissible?
The bill defines a noncompete in section 1(A) as one that prevents employment after the conclusion of employment. However, it is common in certain industries, particularly the financial services industry, to require employees to provide a certain amount of advance notice of their intention to leave. Until the expiration of the notice period, the employees continue to receive their salary although generally relieved of their duties. Thus, it is not a restriction that occurs “after the conclusion of employment” but it does have the effect of preventing the employee from working for a competitor for a certain period of time.
5. To Whom Will the Law Apply?
It is not clear whether the law would apply only to workers in New York State or whether it would apply to all workers of a New York company.
Private Right of Action and Remedies; Prospective Application.
A covered individual has a private right of action against an employer. The court has the power to award injunctive relief (including the power to void unlawful provisions), payment of liquidated damages of up to ten thousand dollars, lost compensation, damages, and reasonable attorney’s fees and costs.
While the FTC’s proposed ban seeks a retroactive application, the New York law states that once the bill is signed and the law takes effect 30 days after the signature, it “shall be applicable to contracts entered into or modified on or after such effective date.”
What’s Next for Employers?
Employers would be well-advised to undertake a comprehensive review of all their restrictive covenants with all their current employees and independent contractors in New York as well as in most jurisdictions in which employees work (as many other states have enacted legislation banning or curtailing noncompetes). As there are so many open questions and because of the nuances regarding the effect that certain permissible clauses may have, employers should not assume that their confidentiality and nonsolicitation provisions or agreements will be valid. In fact, given the attorneys’ fees provision in the proposed bill, it seems likely that employees would bring a claim to invalidate their restrictive covenants.
For more information on the topic discussed, contact:
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