New York State’s End to Non-Compete Agreements

New York may be the next state to jump on the non-compete “ban” wagon.  On June 20, 2023, the New York State Assembly approved bill A01278, a version of the same bill the New York State Senate approved on June 7 (Bill No. S3100A), which seeks to ban new post-termination non-compete agreements under new New York Labor Law Section 191-d.  This comes after, and conforms closely with, the Federal Trade Commission’s proposal (the “FTC’s Proposal”) to ban non-compete agreements as summarized in our blog post titled “The FTC’s New Year’s Resolution: Out with Post-Employment Non-Competes”, dated January 9, 2023, available here. Unlike the FTC’s proposal, however, the bill does not appear to be retroactive or void current non-compete agreements (although this is not clear).  The bill is heading to New York Governor Kathy Hochul’s desk for consideration.

Timing

Governor Hochul has 30 days from receipt to sign the bill.  The law, if signed, will become effective 30 days after Governor Hochul signs it (the “Effective Date”) (which can be as early as mid-August 2023) and will apply to contracts entered into or modified on or after the Effective Date.  Non-compete agreements or clauses entered into prior to the Effective Date and not modified thereafter would remain in effect.  

A Closer Look

Section 191-d provides for the following:

• Non-Compete Agreements.  Covers all agreements, or clauses contained in an agreement, between an employer and a covered individual that prohibits or restricts such individual from obtaining employment after his or her conclusion of employment with the employer. 
  
  
• Covered Individuals.  Covers any person who performs work or services for another person on such terms and conditions that he or she is in a position of economic dependence on, and under an obligation to perform duties for, that other person.  This definition applies regardless of whether the person is employed under an employment contract and is sufficiently broad to cover independent contractors, partners and other service providers as long as they are economically dependent on the service recipient.
  
  
• Total Non-Compete Ban.  Prohibits an employer or its agent, or the officer or agent of any other entity, from seeking, requiring, demanding or accepting a non-compete agreement from any covered individual.  In addition, the bill makes void any provision in a contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.  The reference to “anyone” in this section of the bill is somewhat ambiguous and potentially overreaching, and the reference to making void provisions seems to indicate that the bill might be retroactive, but we do not think this sentence overrides the more specific provisions of the bill that make it clear that it applies only to covered individuals on a prospective basis.  We will need to keep an eye as to whether this language of the bill remains in the signed version. 
  
  
• Explicit Exemptions.  The bill explicitly exempts from its coverage all of the following if they do not otherwise restrict competition in violation of the bill: 
  
  
  • fixed-term agreements;
    
    
  • non-disclosure agreements protecting an employer’s trade secrets or confidential and proprietary client information; and 
    
    
  • non-solicitation agreements prohibiting the solicitation of clients of the employer that the covered individual learned about during his or her employment.
    
    

The bill does not define a fixed-term agreement or discuss whether restrictions on soliciting or hiring an employer’s employees are permissible.  In addition, unlike the FTC’s proposal and many other states’ non-compete laws (including California), the bill does not include a carve-out for non-competes in the sale of business context.

Enforcement Procedures

Under the bill, covered individuals will be able to bring a private civil action against an employer or other persons for violation of the law.  The action must be brought by the covered individual within two years following the latest of: (i) when the prohibited non-compete agreement was signed; (ii) when the covered individual learns of the prohibited non-compete agreement; (iii) when the employment or contractual relationship is terminated; and (iv) when the employer takes any step to enforce the non-compete agreement.

A court may void the non-compete, enjoin the conduct of an employer, or award lost compensation, damages, attorney’s fees and costs.  In addition to the potential remedies listed, courts are required to award liquidated damages of up to $10,000 to every affected covered individual.

Next Steps

As noted, the bill will become effective 30 days from the date Governor Hochul signs it.  The Governor’s office is likely to receive a flurry of requests for revisions to the bill, given that the bill leaves many open questions, such as whether the bill would make it illegal for employers to negotiate with employees that certain compensation would be forfeited if the employee competes (even if the non-compete is not specifically enforceable).  Companies are encouraged to contact a Freshfields attorney with any questions, including, once the law is effective, potential drafting strategies for their restrictive covenant agreements.