New York State Slated to Join Post-Employment Non-Compete Ban Bandwagon

New York State is expected to join the growing number of states that significantly limit or prohibit non-compete agreements. On June 20, 2023, the New York State legislature passed S3100A, a bill broadly prohibiting post-employment non-compete restrictions. S3100A is expected to be signed by Governor Kathy Hochul and would take effect 30 days after her signature. 

Covered Individuals

The proposed ban would broadly cover all employees and independent contractors, without regard to their income level or position. S3100A defines a “covered individual” as “any other person 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 relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.” 

Covered Agreements

Section 2 of S3100A prohibits all entities from seeking, requiring, demanding, or accepting a “non-compete agreement” from any covered individual. A “non-compete agreement” is defined as “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.” 

Section 3 of S3100A provides that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” While S3100A contains no exceptions to the ban on post-employment non-competes, it clarifies that the ban does not prohibit an employer from:

• Entering into a fixed-term employment agreement;
• Prohibiting a covered individual from disclosing trade secrets and confidential and proprietary client information; or
• Prohibiting solicitation of clients of the employer that the covered individual learned about during employment.

Notably, S3100A does not contain an express exception for non-compete restrictions entered into as a part of a sale or dissolution of a business, which is a common exception in the other states that have banned or limited non-competes, as well as the rule recently proposed by the Federal Trade Commission. However, sellers of a business arguably do not fall within S3100A’s definition of a “covered individual,” since they are perhaps not “economically dependent on” or “under an obligation to perform duties for” the buyer (at least with regard to the sale transaction and any non-competes included in the transaction agreements). Further, non-competes entered into between buyers and sellers of a business arguably fall outside of S3100A’s definition of a prohibited “non-compete agreement” because such restrictions are not necessarily “between an employer and a covered individual.” However, it is unclear whether New York courts will interpret Section 3 of S3100A to void sales of business non-competes. Buyers who decide to continue to pursue non-competes from New York-based sellers in the sale of business context should ensure the restrictions are separate from any employment agreements entered into with the sellers and should consider selecting the application of Delaware or another state’s law to the transaction agreements where possible.

Retroactivity

S3100A provides that it shall be applicable to contracts entered into or modified on or after the law’s effective date. Further, New York State courts have generally held that there is a presumption against retroactivity for new legislation. Therefore, it does not appear that S3100A will apply retroactively. However, courts in other states have held in other contexts that modifications to the terms and conditions of an employee’s employment terms (e.g., a compensation change or promotion) effectively modified the underlying employment agreement between the parties, thereby subjecting the entire contract to subsequently passed non-retroactive legislation. It is unknown whether New York courts would adopt this approach when evaluating the application of S3100A to existing agreements. Prior to the effective date of S3100A, employers should consider whether to negotiate non-compete agreements with employees within the state that are completely independent of any existing offer letters or employment agreements, in exchange for independent consideration (e.g., a cash payment or other benefit).

Remedies for Violations

If an entity violates the ban, S3100A allows covered individuals to bring a civil action in court within two years of the later of:

• When the prohibited non-compete was signed;
• When the covered individual learns of the prohibited non-compete agreement;
• When the employment or contractual relationship is terminated; or
• When the employer takes any step to enforce the non-compete agreement.

The covered individual may seek to void the non-compete and seek lost compensation, other damages, and reasonable attorneys’ fees and costs. In addition, courts are directed to award liquidated damages up to $10,000 per every covered individual.

Action Items

In line with our suggestions related to the recent Minnesota non-compete ban, employers should review their non-compete practices and consider working expeditiously to bind competitively sensitive individuals in New York to independent non-competes or implement improvements to existing non-competes prior to the effective date of S3100A. Businesses should also consider updating their confidential information policies and agreements, including reevaluating how employees are provided with access to their highly sensitive and confidential information, as New York State’s non-compete ban would prohibit a tool historically used to prevent unfair competition. Further, given the recent trend of limiting non-competes at both the state and federal level, businesses should continue monitoring developments in this area and tailor their non-compete strategies and practices based on the presumption that other states and agencies are likely to pass or attempt to impose similar restrictions.

Morrison & Foerster LLP is available to discuss strategies to protect employers against unfair competition, including steps employers should take prior to the effectiveness of S3100A.