A historic change in New York competition law is potentially on the horizon: entering into non-compete agreements may become unlawful. These agreements, which typically prohibit sellers of a business or former employees from competing against the buyer or former employer for a limited period of time within a certain geographic area, have long been enforceable provided that the specific terms satisfy a reasonableness inquiry that courts conduct based on the facts and circumstances of each case. However, on June 20, 2023, the New York State legislature passed Bill S03100A, which, if signed by the Governor, would make non-compete agreements unlawful if they are signed or modified after the bill’s effective date. But the scope of the bill is unclear, and if enacted in its current form, it is likely to lead to substantial litigation over its contours.
The bill would add new Section 191-d, titled “Non-compete agreements,” to the Labor Law. In addition to certain definitions in Section 1, the bill contains two prohibitions, and also creates a private right of action that covered individuals may pursue through litigation if they assert that the law has been violated.
Ban On Non-Compete Agreements
First, Section 2 of the bill would prohibit employers, as well as other entities who engage workers, from requesting or entering into new non-compete agreements:
No employer or its agent, or the officer or agent of any corporation, partnership,
limited liability company, or other entity, shall seek, require, demand or accept a
non-compete agreement from any covered individual.
This prohibition is not limited to a traditional employer/employee relationship. Rather, a “covered individual” is defined as “any other 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.”
“Non-compete agreements” that would be prohibited by this section encompass any agreement: “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.”
Second, Section 3 of the bill would render certain non-compete agreements in any context unenforceable:
Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. For all covered individuals, no employer or its agent, or the officer or agent of any corporation, partnership, limited liability company, or other entity shall seek, require, demand or accept a non-compete agreement from any covered individual.
The first sentence in Section 3 is not limited to covered individuals, and therefore would appear to apply even outside the context of someone who performs work or services.
No Effect On Existing Non-Compete Agreements Or Certain Other Restrictive Covenants
The bill, if enacted, should not have any effect on existing non-compete agreements. It states that it would take effect 30 days after it is signed into law, and that it “shall be applicable to contracts entered into or modified on or after such effective date.” As such, the enforceability of existing non-compete agreements should continue to be governed by New York case law on this subject.
The bill would also carve out certain other types of restrictive covenants, provided that they do “not otherwise restrict competition” in violation of the proposed law. These carve-outs are:
• Agreements fixing a term of service;
• Agreements prohibiting disclosure of “trade secrets” or “confidential and proprietary client information”; or
• Agreements prohibiting “solicitation of clients of the employer that the covered individual learned about during employment.”
Private Right Of Action
Section 4 of the bill would allow a covered individual to bring a lawsuit against “any employer or persons alleged to have violated” the bill’s prohibitions. The remedies provided for under the bill include voiding the non-compete agreement and “all other appropriate relief,” which may include: injunctive relief; liquidated damages up to $10,000; awarding lost compensation and/or other damages; and awarding reasonable attorneys’ fees and costs.
The bill would impose a two-year statute of limitations for such a claim, but the trigger for the statute of limitations ranges from the later of when the non-compete was signed to when any steps were taken to enforce it.
Takeaways And Open Issues
If you are an employer that routinely uses non-compete agreements, if this bill is enacted, you will need to re-evaluate your practices going forward. You may need to consider what less-restrictive post-employment restrictive covenants may be appropriate for your business in lieu of a broad non-compete, such as appropriately-tailored confidentiality and non-solicitation restrictions.
Additionally, you should take stock of what non-compete agreements you already have in place. While the bill, by its terms, should not apply to non-compete agreements existing prior to its effectiveness, there is an important caveat: the bill states that it would apply to contracts “modified” after the effective date. Therefore, if the bill becomes law and an employer has a pre-existing non-compete agreement with an employee, the employer would need to be careful about any subsequent modification or amendment of the contract containing that non-compete provision. If there is any subsequent modification or amendment of the contract, even if entirely unrelated to the non-compete clause, the employee may argue that the contract would become subject to the new law, rendering the non-compete unenforceable (and subjecting the employer to a potential claim for damages by the employee). If you have valuable employees who are not currently subject to a non-compete, you may want to consider getting a non-compete agreement in place before the bill is potentially enacted and becomes effective.
Note also that it appears that the bill would not prohibit the use of non-compete agreements for the duration of employment (as opposed to post-employment), although this is not entirely clear. The definition of “non-compete agreement” as used in Section 2 is expressly limited to restrictions “after the conclusion of employment with the employer.” Section 3, on the other hand, does not contain this limitation. Arguably, however, as long as the worker is employed, he or she is not “restrained from engaging in a lawful profession, trade, or business,” and therefore the non-compete may be enforceable during the term of employment. This provision will likely become the subject of judicial construction.
Significantly, the bill does not contain any express carve-outs for commercial transactions or agreements involving sophisticated parties and/or parties represented by counsel, where non-competes are often heavily negotiated and where concerns about unequal bargaining power may not be relevant.
For example, the bill does not have any express exclusion for highly-compensated executives. Moreover, non-compete agreements are often entered into outside the employment context, such as when businesses are formed (e.g., in an operating agreement among members of a limited liability company) or when businesses are sold (e.g., to restrict the seller from competing with the buyer). Arguably, these commercial agreements would not be covered by Section 2, since they would not be agreements between an “employer and a covered individual.” However, these agreements would potentially fall within Section 3, and therefore care would need to be taken that the agreement does not restrict the individual from “engaging in a lawful profession, trade, or business.” Non-compete agreements are also often included in settlement agreements in connection with the termination of employment or resolution of claims between an employer and employee. These settlement agreements, too, would need to be analyzed for whether they fall within the scope of the law, if enacted, depending on the facts and circumstances.
Other language in the bill also raises questions that, if the bill is enacted, will likely lead to litigation and will require clarification from the courts. For example, Section 2 applies to workers who are “in a position of economic dependence on, and under an obligation to perform duties for” an entity. Query whether, for example, a consultant or other independent contractor is “in a position of economic dependence on” the entity that engaged him or her. Even the carve-outs in the bill would create questions about interpretation. For example, the carve-out for confidentiality agreements is limited to “trade secrets” or “confidential and proprietary client information.” Clearly, there are many other types of confidential business information (e.g., pricing information) that an employer would not want a former employee to be able to disclose or use in subsequent employment. Similarly, the carve-out relating to non-solicitation applies to “clients” that the former employee “learned about during employment,” but what about solicitation of employees, prospective clients, or vendors? If a restrictive covenant goes beyond the categories of information specifically mentioned in these carve-outs, employees may try to argue that they are therefore unenforceable. The issue may then become whether the agreement “restricts [the individual] from obtaining employment” (Section 2) or “restrain[s] [the individual] from engaging in a lawful profession, trade, or business of any kind” (Section 3).
We will continue to monitor developments regarding this bill.
For further information, contact:
Preston Ricardo (212) 907-7341
Email: pricardo@golenbock.com
Matthew Daly (212) 907-7329
Email: mdaly@golenbock.com
Alexander Leonard (212) 907-7378
Email: aleonard@golenbock.com
Jeffrey Miller (212) 907-7384
Email: jmiller@golenbock.com
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