Summary of New York’s Potential Ban on Non-Compete Agreements

On June 20, 2023, the New York State Assembly passed Bill No. A01278 (the Bill) that, if signed by Governor Kathy Hochul, would broadly prohibit employment-related non-competes and fundamentally alter the current restrictive covenant landscape in the state. The Bill would take effect 30 days after the governor’s approval¹ and would apply to any non-compete agreement signed or modified after the effective date. This Advisory summarizes the key elements of the proposed legislation.

Prohibition on Non-Competes

Central to the Bill is a comprehensive ban on employers from seeking, requiring, demanding, or accepting a “non-compete agreement” from any “covered individual.” A “non-compete agreement” means any agreement, or clause contained in any agreement, that prohibits or restricts the covered individual from obtaining employment after the conclusion of employment, and a “covered individual” includes any 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. The legislation’s ambiguities leave open whether independent contractors would fall under the provisions of the Bill.

Private Right of Action

The Bill provides a private right of action for covered individuals against any employer or person alleged to have violated the prohibition on non-competes to void that provision and/or seek injunctive relief, attorney’s fees, and costs and liquidated damages (capped at $10,000). Any action may be brought within two years of the later of the following events: (1) when the non-compete was signed, (2) when the covered individual learns of the non-compete, (3) when the employment or contractual relationship is terminated, or (4) when the employer takes steps to enforce the non-compete.

Limited Exceptions

• Non-Disclosure and Client Non-Solicitation Agreements. Confidentiality agreements protecting trade secrets and confidential and proprietary client information, as well as agreements preventing the solicitation of clients that the covered individual learned about during employment, are permitted under the Bill, provided that such agreement “does not otherwise restrict competition” in violation of New York statutes. The Bill does not address employee non-solicitation agreements.
• Fixed-Term Contracts. The Bill does not apply to contracts that establish a “fixed term of service”; however, the Bill does not elaborate on the meaning of that term.
• No Sale of Business Exception. Unlike other states that have banned or limited non-competes, the Bill does not provide for an exception in the case of a sale of a business.

Takeaways

While the Bill is pending approval, we note that other bills banning non-competes have been advanced in the New York state Senate, and this area is evolving very quickly. Employers with operations in New York state should prepare for the possibility that it  will join the growing number of states that are moving to limit non-competes by evaluating their reliance on non-compete agreements and provisions intended to protect trade secrets and confidential information. Given the changes in this area, all employers will want to review their agreements and handbook provisions to see if they continue to be enforceable for some or all employees. We will continue to monitor the status of this legislation.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.