New York Assembly Passes Bill to Ban Non-Compete Agreements

On June 20, 2023, the New York State Assembly passed a bill (A1278B) to make non-compete agreements unlawful. The New York State Senate previously passed the bill’s counterpart (S3100A). The bills aim to prohibit non-compete agreements and authorize covered individuals to bring a civil action against employers alleged to have violated the bills’ provisions. The bills make clear that they would ban non-competes entered into or modified after the effective date. If signed by Governor Kathy Hochul, the bills would come into effect 30 days after being signed into law. While the business community reacted with shock and anger at the bills, the proposed bills in New York follow the nationwide trend against non-competes that we have been tracking for the past several years.

The bills amend current labor law by voiding non-compete agreements and contracts “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” Moreover, no employer may require, demand, or accept a non-compete agreement from a covered individual, which includes both employees and independent contractors.

Should an employer violate the provisions of these bills, a covered employee may bring a civil action against the employer. Courts will have jurisdiction to void such non-compete agreements and order all appropriate relief, including enjoining the conduct of the employer, ordering payment of liquidated damages, and awarding lost compensation, damages, reasonable attorneys’ fees and costs.

The bills specifically exempt from coverage non-disclosure agreements and non-solicitation agreements limited to customers of the employer that the covered individual learned of during employment, as long as any non-disclosure agreement or non-solicitation agreement does not “otherwise restrict competition in violation of this section.” This ambiguous language will allow employees to argue that non-disclosure or non-solicitation provisions should be considered null and void because they restrain them from engaging in their chosen profession, trade or business. While the above-language addresses non-solicitation agreements related to an employer’s customers, the bills are silent as to non-solicitation agreements related to an employer’s employees.

These bills come shortly after the Federal Trade Commission (FTC) proposed a rule banning non-competes, including those already in effect and superseding state laws, and the National Labor Relations Board (NLRB) General Counsel released a Memorandum attacking non-compete agreements as violative of the National Labor Relations Act (the “Act”), claiming the provisions of such agreements violate the Act when they interfere with an employee’s exercise of rights under the Act. The New Jersey legislature has also seemingly on an annual basis considered similar prohibitions on non-competes.

BOTTOM LINE

Businesses need to make sure any new non-compete agreements have a choice of law that is not New York. Normally this requires that the business have some nexus to whatever state’s law they choose, so for many New York businesses, this will mean changing choice of law in future non-compete agreements to Delaware law. On a more fundamental level, traditional non-competes are becoming harder to enforce, and non-solicitation and non-disclosure agreements are likely to become the less effective but more enforceable method for businesses to protect their trade secrets and other confidential information. Businesses need to start embracing a future where non-competes may not be enforceable or be significantly limited. For guidance on assisting employers in protecting trade secrets, confidential, and proprietary information in this dramatically changing environment, please contact Harris S. Freier, Esq., Partner in the firm’s Employment Law & Litigation Practice Specialty via email here or call 973.533.0777.