A bill that would ban nearly all forms of non-competition restrictions in New York passed both houses in the state legislature and is now with Gov. Kathy Hochul to sign into law. If signed, this would have profound implications for corporate transactions involving New York entities and personnel.
If enacted, the law would void “[e]very contract by which anyone is restrained from engaging in a lawful, profession, trade, or business of any kind.” Entities would be prohibited from entering into an agreement containing a non-competition restriction with any individual in New York who is in a position of “economic dependence on, and under an obligation to perform duties” for the entity. It is worth noting that, while several provisions of the bill reference “employers” and “employment,” as currently drafted, the restrictions would appear to apply equally to independent contractors.
Notably, the bill does not contain common exceptions typically found in such prohibitions, such as non-compete covenants entered into in connection with the sale of a business. For instance, California, where nearly all forms of non-competes are prohibited, has certain carve-outs permitting non-compete restrictions with respect to sellers of a business to protect the “goodwill” of the ownership interest acquired by the buyer. Likewise, under the proposed Federal Trade Commission rule introduced on Jan. 5, 2023, which would significantly restrict employment-related non-compete agreements throughout the country, there is a narrow exception in the context of mergers and acquisitions (i.e., for those employees remaining involved after the merger or acquisition is complete, individuals with a 25% or greater interest in the acquired company can be subject to a non-competition restriction). It also is not clear whether “voluntary” non-compete arrangements (e.g., compliance with non-compete restrictions to retain equity, or paid “garden leave” periods) are barred by the proposed New York law.
The bill does not, by its terms, apply to existing agreements containing non-competition restrictions; it applies only to non-compete agreements entered into or modified on or after its “effective date,” which would be 30 days after the Governor’s formal approval.
Private Right of Action
The bill would create a private right of action for covered individuals (including former employees), who would be permitted to bring lawsuits:
- Seeking to void any non-compete that violates the law;
- To obtain injunctive relief against enforcement of the non-compete; and
- To recover lost compensation, damages and reasonable attorneys’ fees and costs.
The bill also provides that “the court shall award liquidated damages [up to $10,000] to every covered individual affected under this section.” (Emphasis added.) Actions would need to be brought within two years of the later of (i) the prohibited non-compete being signed, (ii) the covered individual learning of the prohibited non-compete agreement, (iii) the termination of the employment or contractual relationship, and (iv) the employer taking any steps to enforce the non-compete provision.
Other Post-Employment Restrictions
The bill is clear that it applies only to non-competition restrictions. It does not impact the ability of entities to “prohibit disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the covered individual learned about during employment, provided that such agreement does not otherwise restrict competition in violation of this section.”
Impact on Mergers and Acquisitions
Sale and purchase agreements typically include provisions pursuant to which key personnel agree to refrain from competing with the business for an established period of time. As it is currently drafted, such provisions appear to be prohibited by the New York bill to the extent these key personnel are in New York and will have an ongoing employment or contractual relationship with the purchasing entity. The bill does not appear to restrict non-competes in situations where no such ongoing relationship is contemplated. This creates an odd dichotomy—purchasing entities are better able to protect their newly-acquired business by not retaining key individuals located in New York.
The bill also does not prohibit “fixed term” contracts with employees but provides no insight into what that would mean in practice. This provision could allow for garden leave arrangements (i.e., paying base salary while a non-compete restriction is in effect and not requiring the employee to perform work during that period) but employers will need to receive additional clarity on the provision’s meaning before they can rely on that interpretation.
If signed into law, this non-competition ban will alter the landscape for entities operating in New York. What to do? Timing is key.
- Entities who wish to have non-compete agreements should ensure that they are in place and up to date prior to the effective date of this law, assuming it is enacted.
- Entities planning to go to market should ensure that appropriate non-compete restrictions are entered into in advance of the effective date of the law.
- With respect to deals currently pending or contemplated, this should be a topic of immediate diligence and prompt remediation as needed.
- If and when the law becomes effective, buyer entities would be well advised to assess whether and how to maintain existing non-compete restrictions (i.e., those that are “grandfathered in”). This can be effectuated by assigning prior restrictive covenant agreements between employees and sellers rather than entering into new ones in connection with corporate transactions. This may also be effectuated by relocating key individuals outside of New York.
- Entities should be cautious about modifying existing agreements containing non-compete provisions, given that such modifications may cause the agreement to lose its grandfathered status.
- Choice of law and venue provisions should be carefully considered, and where reasonably possible, jurisdictions other than New York should be selected.
- Companies should review their agreements with New York workers going forward to ensure that confidentiality provisions, non-solicitation and non-recruitment restrictions and related provisions are drafted in a way that adequately protects their proprietary interests without inadvertently creating prohibited restrictions on competition.
Legal counsel well-versed in restrictive covenant laws can assist in this process to ensure that companies are adequately protecting their interests.
This document is intended to provide you with general information regarding pending legislation in New York that would effectively ban most non-compete agreements. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.