Key Takeaways

• New York is moving toward a statute restricting the use of noncompetes.
• The New York State Legislature this week passed a bill that would make New York perhaps the most restrictive state when it comes to noncompetes, and it is awaiting the governor’s action.
• New York’s bill is more restrictive than the proposed FTC noncompete rule, which at least contains a narrow exception in the M&A context.
• This is potentially the broadest prohibition yet in any jurisdiction.

New York is now the only purely common law state in the country without any statutory guidelines governing both post-employment noncompetes and trade secrets. But that may be about to change. The New York State Legislature this week passed a bill that would make New York perhaps the most restrictive state when it comes to noncompetes. If signed by the governor, the bill, approved without any public hearings, would prohibit any agreement that “prohibits” or “restricts” an employee’s post-employment activities.

Limiting the use of noncompetes has been a national trend in recent years, especially as applied to lower-salaried employees. And the Federal Trade Commission (FTC) is in the midst of a rule-making proceeding on a proposed broad national ban. The proposed FTC rule as drafted would categorically ban employers from using noncompete clauses with workers, subject to a narrow exception for noncompete clauses between the seller and buyer of a business when the person restricted by the noncompete clause holds at least a 25% ownership interest in the target prior to the sale.

But the New York bill goes further than either the proposed FTC rule or California’s historic statutory prohibition on restrictive covenants in that it would apply even to owner-employees who sell their companies and to highly compensated executives with significant stock ownership. 

The New York legislation includes a provision creating a private right of action for employees to sue employers that impose or require new noncompetes once the law is enacted. While the legislation provides for liquidated damages of only $10,000 when a violation is proven, that amount is per violation, opening the door to employee class actions against employers who violate the law. In addition to the liquidated damages, the legislation also includes awards for lost compensation and attorneys’ fees, creating a broad private litigation scheme for enforcement under the bill.

The text of the legislation authorizes the continued use of agreements protecting trade secrets and confidential and proprietary information.

While the bill language states that nonsolicitation agreements as applied to “clients of the employer that the covered individual learned about during employment” will be permitted, it clarifies that such client nonsolicitation agreements will be permitted only “provided that such agreement does not otherwise restrict competition in violation of this section.” The requirement that nonsolicitation agreements may apply to clients that the employee “learned about during employment” reflects but is arguably somewhat broader than the common-law decisions in BDO Seidman v. Hirshberg and Ticor Title v. Cohen protecting the books of business that employees bring with them to a position. 

Presumably, although not stated explicitly, the bill would also prohibit post-employment agreements even when the employee is paid for the restricted period, as well as employee nonsolicitation agreements. Whether notice or so-called garden leave provisions, under which the employee remains a paid employee during a required period, are prohibited or permitted is not immediately clear from the text of the legislation.

The process going forward is that the bill will be submitted to Governor Hochul. The timing required for her action and whether she needs to explicitly sign or veto the bill depends on whether the Legislature is still in session, leaving this bill open to continued negotiation between the Legislature and the governor. In the meanwhile, the business community is expected to lobby the governor for either an outright veto or amendments including a salary threshold and a sale of business exception.

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