If your business deals with any kind of sensitive proprietary information or sensitive client or customer relationships (read, many of you), you probably use various forms of restrictive covenants-noncompetition, non-solicitation, and nondisclosure agreements-as protection. You've also probably read dozens of articles to the effect that [insert shrill tone here]federal and state authorities are all about to kill noncompetes!
We don't think the story is that simple. While (for example) the Chair of the Federal Trade Commission has underscored the silliness of noncompetes applied to fast food workers (we agree), the reality is that high-level executives, employees whose jobs involve the creation of trade secrets, and employees at the top of customer-management hierarchies really can use information and relationships they do not "own" to their unfair competitive advantage. And what about your startup, now worth $100 million, that you sell to a private equity firm? Should you be allowed to instantly compete against the business and goodwill you just sold for a lot of money?
The blunt instrument pursued by the FTC, the National Labor Relations Board, and state legislatures-an outright, sweeping ban on "noncompetes," which is usually defined as any agreement that tends to interfere with obtaining future employment-will run into precisely these kinds of legitimate concerns. One state leading the blunt-instrument charge, New York, is facing this public-policy question now. We say it's a "policy" question because (to put it bluntly, pun intended), it may be great to be a progressive jurisdiction, but it starts to seem less great when businesses and the jobs they create decide to flee to other states with less sweeping and more sensible limitations.
On June 20, 2023, the New York State legislature passed a Bill that, if signed by Governor Kathy Hochul, would effectively ban non-competition agreements and certain other restrictive covenants throughout the state, for all workers, and without taking into account the considerations involved in the sale of a business. There are reasons the Bill remains unsigned (hint: re-read the first sentence of this paragraph). Unsurprisingly, recent news out of Albany suggests that the Governor may require certain amendments be made before doing so. Employers should not view their non-compete agreements as unenforceable quite yet, and wait for further information to come out regarding whether the ultimate law may require compensation limits or job-based requirements.
The Pending Bill
The pending Bill would result in a near-total ban on non-competition agreements in New York, regardless of compensation, job requirements or access to confidential information. The Bill does not even carve out non-competes entered into as part of the sale of a business; however, arguments may exist that a seller of a business may not qualify as a "covered individual" under the law.
Even though the Bill is intended to be broad sweeping, it does not affect the enforceability of (i) fixed-term employment agreements, (ii) agreements preventing solicitation of clients that the employee learned about during their employment, or (iii) agreements prohibiting the disclosure of trade secrets, confidential information, or proprietary client information. Thus, even under the new Bill's framework, New York employers still have some means of legitimately protecting their business information and other legitimate interests.
The Bill provides a private right of action for employees to sue their employers in state court in order to void potentially unlawful agreements. Further, the Bill provides that employers who attempt to enforce unlawful agreements or have their employees sign them, may be liable for lost compensation, attorneys' fees, and liquidated damages up to $10,000 per violation.
What to Do Now
Nothing, really. It is unclear if the Bill will be signed or amended. For example, Governor Hochul has previously expressed her support for a non-compete ban for low wage workers. Meanwhile, the Bill's sponsor, State Senator Sean M. Ryan, has made public statements discussing how the ban would provide greater access to healthcare by not forcing doctors to have to leave their chosen geographic location if they leave their employer.
However, low wage workers and physicians are much more sympathetic targets for a non-compete ban than, for example, brokers or consultants, who may be able to use their employer's trade secrets and non-public information to unfairly compete virtually from day one. While the Bill would allow employers to still protect their trade secrets, the truth of the matter is that proving a violation of a confidentiality restriction is much harder than proving breach of a non-competition restriction, where the pertinent information may be available directly on Google or LinkedIn.
Similar to the FTC's and NLRB's similar efforts to curb non-competition agreements, the impact of New York's latest action may be exaggerated, and the "death of the non-compete" is still a long way off. To be clear, the momentum against noncompetes does make it likely that New York and other jurisdictions will adopt restrictions more on the order of what Illinois has done, i.e., perhaps no outright ban, but various requirements as to minimum salary level and consideration paid in exchange for a noncompetes that will make their broad use or overuse more difficult for employers. The use of noncompetes is otherwise too embedded in legitimate protection of important company interests for their opponents' fantasies about their disappearance to materialize in any simple, unified, dramatic way.
Our best, and admittedly simple, advice to our clients is to: keep calm, carry on; and wait and see. Don't ditch your noncompetes just yet, because you may not have to.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
