New York’s Potential Ban on Noncompete Agreements: What You Need to Know

On June 20, the New York State Assembly passed bill A01278, which aims to ban new noncompete agreements for most employees. If Governor Kathy Hochul signs the bill, it will take effect 30 days later. New York’s ban would apply without regard to employees’ compensation or position within the company.

We outline below the significant aspects of the potential law and provide insights to help companies navigate these changes.

Highlights from the New York Bill

1. The proposed ban is prospective — not retroactive.

The new legislation will not have a retroactive effect, meaning that noncompete agreements entered into prior to the effective date of the new law will remain unaffected. Because the bill is prospective and has a 30-day delay from the time of the governor’s signature to the time it takes effect, there is now a narrow window for companies to review existing agreements and to close the loop on current negotiations.

2. There is no exception for employee noncompete agreements entered into in connection with the sale of a business.

Significantly, the bill includes no express carve-out for noncompetes entered into in connection with the sale of a business, which is commonly allowed even in other states’ broad employee noncompete bans, like Minnesota’s recently enacted statute. Indeed, even the FTC’s sweeping proposed rule that would ban noncompetes nationwide contains an express carve-out permitting noncompetes in connection with the sale of a business. It is possible that New York courts will rely on common law to imply a similar carve-out to the New York ban if enacted, but this omission creates significant uncertainty for what often is a material deal term for corporate acquisitions.

3. There are limited exceptions to the proposed ban.
 

Though the legislation is sweeping in its approach, it does provide limited exceptions to its coverage. For example, noncompetes may be permissible in “fixed term of service” agreements, to prohibit the disclosure of confidential and proprietary client information, and to protect trade secrets. The bill also does not prevent customer non-solicitation agreements, so long as (1) the employee learned of those customers during his or her employment and (2) the customer non-solicitation covenant does not effectively function to restrict competition. Because the bill does not affect New York’s existing reasonableness test, however, companies should remain cognizant that courts can narrow the scope of customer non-solicitation agreements—even though the agreements are allowed by the bill.

4. The proposed law creates more questions than it answers.
 

Despite the breadth of the proposed ban, it is notably silent on several issues. For example, the bill makes no mention of employee non-solicitation agreements, which prevent departing employees from encouraging others to leave with or join them. Further, the bill does not address whether employers are allowed to pay former employees under “garden leave” arrangements for post-employment restrictive covenants. Nor does the bill address “forfeiture for competition” provisions under which a departing employee may forfeit equity or deferred compensation if the employee chooses to compete. The failure to address these provisions is puzzling because they are very common in some segments of the New York business community, especially the financial sector.

Given the bill’s sweeping coverage, imprecise drafting, and silence on several important issues, it is likely that its contours will be resolved only through years of appellate litigation that likely would leave unsettled into the next decade New York law governing noncompetition covenants.

5. The bill provides covered employees with a private right of action.
 

In addition to voiding “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” the bill also provides certain aggrieved employees with a private right of action. The civil action must be filed against the employer within two years of (i) when the prohibited noncompete agreement was signed; (ii) when the employee learns of the prohibited noncompete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the noncompete agreement. Courts may award injunctive relief, lost compensation, damages (including additional statutory liquidated damages up to $10,000), and attorneys’ fees and costs.

What Companies Can Do Now

While the bill still awaits the governor’s signature, the time to prepare is now. Because the bill presages a significant shift in the New York’s employment landscape, companies should ensure they understand the nuances of the proposed legislation so that they can best prepare for the changes it may bring. As we have discussed previously, there is growing hostility in many states to noncompetes, which requires companies to carefully review existing noncompetes and craft a strategy to protect their legitimate business interests that incorporates other restrictive covenants and contractual provisions, trade secrets protection, and other mechanisms, as appropriate.

We will continue to provide updates on this developing legislation.