United States: New York Stands Ready To Rein In Covenants Not To Compete

The New York State Assembly on June 20, 2023, passed Bill A01278, amending the New York Labor Code and prohibiting covenants not to compete, with certain notable exceptions, while also giving covered individuals the right to bring a civil action for violations of the law. Bill A01278 awaits the signature of Gov. Kathy Hochul and would become effective 30 days after it is signed.

Bill A01278 follows a trend of other states taking similar steps to curtail the usage of noncompete agreements. Illinois and Colorado recently passed legislation significantly restricting the use of noncompete agreements, and Minnesota this year passed a ban on most noncompete agreements. Additionally, the Federal Trade Commission (FTC) in January announced a proposed rule that would supersede all contrary state laws and essentially create a nationwide ban on noncompete agreements in employment contracts.

What Does Bill A01278 Cover?

Under the bill, employers may not require or accept a covenant not to compete from a covered individual.¹ The bill broadly defines a covenant not to compete as "any agreement, or clause contained in an agreement, between an employer and a covered individual that prohibits or restricts [the] individual from obtaining employment, after the conclusion of employment with the employer."² The definition of "covered individual" is similarly broad and covers any individual "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 a position of economic dependance on, and under an obligation to perform duties for, that other person."³ It remains unclear with independent contractors fall within the definition of a covered individual.

The bill expressly provides that employers may continue to prohibit "disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the individual learned about during employment."⁴ The legislation also permits an employer to enter into a covenant not to compete with an individual with an agreement that established a "fixed term of service." The bill, however, does not define "fixed term of service."

The bill pertains only to agreements reached after the law becomes effective. Existing agreements would not be impacted, unless they were to be modified after the effective date of the law.

What Are the Potential Consequences of Noncompliance with the Law?

The bill grants covered individuals the right to bring a civil action against employers alleged to have violated these provisions. Individuals would have two years after the alleged violation to bring a private right of action to void any noncompete clause that violates New York law and recover for lost compensation, damages, reasonable attorneys' fees and costs, and liquidated damages. Liquidated damages are capped at $10,000.

Unresolved Issues

The bill does not address certain circumstances and raises numerous questions. For example, it does not include an exception in the context of a sale of a business and also is silent with regard to employee non-solicitation agreements.

Finally, there is also the question of how this bill would interact with the FTC's proposed rule banning covenants not to compete. Unlike the New York Bill, the FTC proposal would apply retroactively to covenant not to competes already in effect. However, the FTC proposal also includes a sale of business exception not found in New York's bill. Earlier this year, the New York State Senate had considered a separate proposal mirroring the FTC proposal, but that bill remains in committee.⁵ Its status going forward is unclear with the Senate having now approved the current bill.

Takeaways

It is unclear at this time if Hochul will sign the bill. However, she has previously voiced support for a ban on certain noncompete agreements. In her 2022 State of the State address, Hochul called for legislation that would prohibit noncompete agreements for employees making less than the state's median wage.

The bill, if enacted, will have a dramatic impact on New York employers. Employers should carefully review their policies on using noncompete agreements and be prepared to revise their form agreements if the bill becomes law. They also should consider whether their objectives to protect customer relationships, trade secrets and other confidential information can be achieved without a covenant not to compete, such as through well-drafted nondisclosure agreements and customer and employee non-solicitation agreements. Employers also may consider using fixed-term agreements for select employees if a covenant not to compete is desired.

Footnotes

1. N.Y. A01278B § 1(191-d)(2).

2. Id. § 1(191-d)(1)(a).

3. Id. § 1(191-d)(1)(b).

4. Id. § 1(191-d)(5).

5. N.Y.S. Senate Bill S6748.

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