Proposed Changes to the Use of Non-Compete Agreements in New York

Fenwick & West LLP

Fenwick & West LLP

The Trade Secrets Committee of the New York City Bar recently published a report proposing that New York State enact a statute to regulate the use of non-compete agreements. The committee had become increasingly concerned over the rampant use of these agreements with respect to low-wage employees because of the consequences that they can have on the employment market and on employees—and because low-wage employees are less likely to be exposed to trade secrets. Currently, New York is the only state without a statute concerning trade secrets or non-compete agreements.

The committee’s report explored the history of and the national conversation surrounding non-compete agreements. Following the passage of the Defend Trade Secrets Act in 2016, the Obama White House issued a “State Call to Action on Non-Compete Agreements” that called on states to pursue best practices with respect to such agreements. Those “best practice policy objectives” included banning non-competes for certain categories of workers, improving the transparency and fairness of these agreements and incentivizing employers to write enforceable contracts. Following this, nine states enacted legislation limiting the use of non-compete agreements for low-wage workers: Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, Rhode Island, Virginia and Washington.

Currently, New York courts will enforce non-compete agreements only where the restrictions are no greater than required to protect an employer’s “legitimate protectable interest,” they do not impose undue hardship or cause injury to the public, and they are reasonable in both duration and scope. Previously recognized protectable interests include an employer’s trade secret, an employer’s goodwill and an employer’s interest in preventing loss of an employee whose services are special, unique or extraordinary.

After conducting a systemic review of the consequences of not having statutory guidelines to govern the use of non-compete agreements, the committee recommended the adoption of a statute that would create a rebuttal presumptive prohibition on the use of non-competes for lower-salary employees. This presumption could be rebutted on the condition that “(1) the employer agrees to pay the affected employee’s full pro-rated compensation for the entire duration of any noncompetition period, (2) the agreement is found to be enforceable under any of the existing New York common law bases for enforcing a noncompete agreement and (3) the employee has full notice of both the noncompete covenant and the employer’s intention to enforce it before entering into the employment relationship.” In the committee’s view, this approach balances the commercial considerations of the New York economy and provides procedural fairness to the employee.

In light of these proposed changes, employers in New York should exercise caution in including non-compete agreements for low-wage employees who are unlikely to be exposed to trade secrets. If an employer includes a non-compete in their contract, it is important that the employee has notice of that agreement, and that the agreement is reasonable in duration and scope.

It still remains to be seen whether these proposed changes to the use of non-compete agreements will lead New York to join the other 49 states and adopt the Uniform Trade Secrets Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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