While NY’s Non-Compete Bill Is No More, the Lesson for Businesses Remains: Update Your Agreements

Last month, Governor Kathy Hochul vetoed a bill that would have made New York the fifth state to outlaw non-compete agreements, joining California, Minnesota, North Dakota, and Oklahoma in doing so.^[1] This proposal presented stark changes from longstanding New York law regarding non-compete agreements, riding the wave of recent legislation on restrictive covenants seen across the country. However, the proposed broad, nearly unconditional ban on restrictive covenants presented too many drawbacks, and the current law remains intact.

A non-compete agreement prohibits an employee from working for a competitor of its employer or opening a competing business.[2] Typically, it will span a discrete time period and cover a specific geographic region. It may be part of a larger employment contract or a standalone agreement an employee signs before or after employment begins.[3] They are generally enforceable if they abide by certain parameters. Since the law disfavors unreasonable restraints on trade, courts closely scrutinize them.^[4]

To be enforceable under New York law, the non-compete must: (1) protect a legitimate business interest of the employer, (2) impose no undue hardship on the employee, and (3) present no violation of public policy.[5] The party seeking to enforce the non-compete – typically, the employer – has the burden of proof.[6] Legitimate protectable interests include protecting goodwill or customer relationships and preventing the disclosure of confidential information.[7] Undue hardships on the employee include unreasonable broad geographic and unduly long time restrictions, and both involve fact-specific inquiries as to whether the protection is necessary for the employer.[8] When restrictive covenants are overbroad, courts have the authority to modify and partially enforce them,[9] sometimes called “blue-penciling” the agreement. When enforced, employers may obtain injunctive relief and/or monetary damages from projected lost profits.[10]

The bill that Governor Hochul vetoed presented a significant departure from the existing standards in New York. For example, it would have banned non-competes that meet the previously accepted criteria, which speaks to its all-encompassing nature that ultimately led to its undoing. It defined non-compete agreements extremely broadly, as “any agreement, or clause contained in 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 included as a party to the agreement.”^[11] It also broadly defined covered individuals. Covered persons did not necessarily need to be employed under an employment contract,^[12] opening the door to independent contractors falling under the bill’s protection. The lack of nuance and distinction were main reasons for its opposition. Other states have added complexity to their non-compete regulation through salary and job level distinctions. A $250,000 salary threshold was discussed, but the bill did not include such a salary limiting enforcement cap. With no salary cap, the ban would have applied to anyone, ranging from starting intern to the most senior executive, with no carve-outs or qualifiers. [13]

Though New York’s bill has been vetoed, the takeaway is clear. The landscape for restrictive covenants is changing. The groundswell across government entities nationwide is undeniable: the FTC has proposed legislation, the NLRB’s General Counsel issued a non-competes memo concerning the National Labor Relations Act, and other states have been proposing new regulations. [14]

Employers would be wise to update their agreements in light of recent developments. Among other things, they should focus on provisions that are not technically non-competes, for example, confidentiality and trade secret protection clauses. These terms have become more valuable, since they protect business interests while presented less vulnerability to potential future legislation.[15] They should also focus more on non-solicitation agreements, which prevent former employees from recruiting away longstanding clients to other employers and competitors. It is important to stay abreast of these changes. As the adage goes, the only constant is change. So, remember to change with the times – to thrive.

[1] Jason Schwartz, et al, New York’s Non-Compete Ban Awaits Governor’s Approval, (Jun. 23, 2023), https://www.gibsondunn.com/new-york-non-compete-ban-awaits-governors-approval/.

[2] BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388–89, 712 N.E.2d 1220, 1222 (1999).

[3] Letitia James, Non-Compete Agreements In New York State: Frequently Asked Questions, (Oct. 26, 2018), https://ag.ny.gov/sites/default/files/publications/non-competes.pdf.

[4] Innovative Networks, Inc. v. Satellite Airlines Ticketing Centers, Inc., 871 F. Supp. 709 (S.D.N.Y. 1995).

[5] Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364, 369, 34 N.E.3d 357, 361 (2015)

[6] id. at

[7] id.

[8] Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331, 332, 853 N.Y.S.2d 75, 77 (2008).

[9] Brown & Brown, Inc., supra.

[10] Earth Alterations, LLC v. Farrell, 800 N.Y.S.2d 744, 745 (2d Dep’t 2005); Barone v. Marcisak, 465 N.Y.S.2d 561, 562 (2d Dep’t 1983).

[11] N.Y. Assemb. B. No. 1278, Legis. Sess. 246, (Jan. 13, 2023).

[12] id.

[13] Lauren Weber, New York Could Be the Latest State to Ban Non-Compete Agreements, (Dec. 6, 2023), https://www.wsj.com/politics/policy/new-york-non-compete-employment-a72a006e.

[14] Press Release, F.T.C., FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023) (on file with author); Non-Compete Agreements that Violate the National Labor Relations Act, NLRB Gen. Counsel Mem. GC 23-08 (May 30, 2023).

[15] Perfect Fit Glove Co. v. Post, 222 A.D.2d 1025, 635 N.Y.S.2d 917, 918 (1995).