Not So Fast: New York State’s Potential Non-Compete Ban Stalls Out (For Now)
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 about to kill all 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 they usually define 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 seem great to be a progressive jurisdiction, but it starts to seem less great when businesses and the jobs they create 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 noncompetition agreements and certain other restrictive covenants throughout the state, for all employees, regardless of whether they flip burgers or own hedge funds, and without taking into account the considerations involved in the sale of a business. There are reasons Hochul’s executive pen has hovered over the Bill without signing (hint: re-read the first sentence of this paragraph). Recent gossip out of Albany suggests that the Governor may require certain amendments to the proposed law before reconsidering it. Those amendments—all likely aimed at tailoring the law to address legitimate employer concerns—might include minimum salary thresholds to enforce a noncompete, additional consideration an employer might have to pay to make a noncompete enforceable, requirements that would allow noncompetes to be enforced only if an employee had certain job duties, and carveouts for certain industries.
Translation: if you are an employer that is panicking, please take a deep breath. Think of your planned beach vacation. Manifest a future that isn’t devoid of noncompete protections. Your noncompetes aren’t unenforceable yet, and whatever form the New York “ban” will take is less likely to look like a “ban” than a series of surmountable obstacles that will force employers to deploy noncompetes more sparingly and thoughtfully. (By the way, this is something we have always advised employers to do anyway; you ultimately have to explain to courts why this restriction as applied to this employee is absolutely critical to protecting your business from unfair competition, and your argument had better sound plausible.)
The Pending Legislation in New York
The pending Bill would result in a near-total ban on noncompetition agreements in New York, regardless of compensation, job requirements or access to confidential information. The Bill does not even mention, let alone account for, noncompetes that might protect buyers in the event of the purchase of a business (though there are arguments that a seller of a business may not qualify as a “covered individual” under the law).
Although the Bill is intentionally broad, 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. While Governor Hochul has previously expressed her support for a noncompete ban for low-wage workers, that support is a far cry from a full-throated condemnation of all noncompetes. Even the public statements of the Bill’s sponsor, State Senator Sean M. Ryan, have implied ways of narrowing the current bill without burning everything down; for example, he is on the record as saying that 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.
Ok, we see the argument when it comes to ensuring broad access to patients’ choice of healthcare professionals. And we certainly see the argument on behalf of fast-food workers. The moral argument for liberating other downtrodden employees, like impossibly wealthy portfolio managers at investment firms, seems a little less obvious.
Low-wage workers and doctors are much more sympathetic as subjects of a noncompete ban than, say, investment bankers, who may be able to use their employer’s trade secrets and non-public information to unfairly compete virtually from day one. And 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 and nondisclosure obligations is a tough or undesirable position to be in: you have to wait to see the evidence of damage, unlike with a true noncompete, where you don’t have to worry as much about the damage in the first place, and where proving a violation if often a matter of a quick peek on Google or LinkedIn.
The death of the noncompete in New York and elsewhere, therefore, has already been greatly exaggerated. (It also feels a bit disrespectful to talk about what life will be like following the death of a long-honored family member when they’re actually still alive and sitting next to you in the living room.) Similar to the FTC’s and NLRB’s similar efforts to curb noncompetition agreements, the impact of New York’s latest action is a long way off from being felt, and the nature of the desired impact is likely to come up for debate again in the legislature. 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. If you have any questions regarding noncompetition agreements, restrictive covenants or other ways to protect important information, please contact a member of our Labor and Employment team.