Recent legislation in New York has significantly changed the law on non-compete agreements. Bill 3100, which creates a new section in the New York State Labor Law, prohibits employers and employees from entering into non-compete agreements. NY Senate Bill 6748 would invalidate existing non-compete agreements. Both bills were signed into law in 2023. As a result, non-compete agreements are now generally banned in New York, with some exceptions, such as agreements that establish a fixed term of service, prohibit disclosure of trade secrets, or prohibit solicitation of clients.
This is huge.
Historically, New York has been considered pro-employer for the most part. Having said that, the trend in the law prior to the new legislation disfavored non-compete agreements. Yet, they were, until recently, enforceable if they meet certain criteria. For example, in Investor Access Corp. v. Doremus Co., Inc., the court upheld a non-compete agreement because it was limited in time and scope and did not unreasonably burden the employer. Similarly, in Giller v. Harcourt Brace Co., the court found that a non-compete agreement was enforceable because it was reasonably related to time and scope and not unreasonably burdensome to the employer. However, in Univ. Sports Publ. Co. v. Arena Media Networks, the court found that the non-compete agreement at issue was overly broad and unenforceable. The limitations and criteria set by the Courts now seem to have been made irrelevant by the new law.
New York law now prohibits the use of non-compete agreements, which are defined as any agreement that restricts an individual from obtaining employment after leaving the employer.
Why is this NY State ban on non-compete agreements significant?
Because it overturns the common law standard referenced above that allowed for the enforcement of non-compete agreements if they were reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public, and not unreasonably burdensome to the employee. These somewhat subjective analyses were left to Courts to unravel, requiring them to weigh competing interests of the employer, employee and the public at large. Courts are reluctant to enforce any agreement that prevents someone from earning a living, reasoning that doing so may result in an increased reliance on public assistance and higher unemployment in general.
Are there any exceptions to the new legislation?
Yes, a few: Employers can still enter into other types of agreements such as the prohibition against disclosure of trade secrets or confidential information, or that prevent the solicitation of clients. These agreements are permissible as long as they do not restrict competition in violation of the new law.
The legislation also provides remedies for employees who are subject to an unlawful non-compete agreement. They can bring a civil action against the employer, and the court is authorized to void the agreement, award liquidated damages, and provide other relief such as lost compensation or attorney’s fees. Surely these provide incentives for employers to be careful before they negotiate an employment agreement with a new hire and to reconsider existing employment agreements that include non-compete provisions.
The new non-compete law provides that it shall be applicable to contracts entered into or modified on or after its 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 it 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 modify 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.
What’s the Bottom Line For New York Employers Moving Forward?
The bottom line is that employers should be concerned about modifying existing agreements in any respect and be prepared to exclude non-compete provisions from their employment contracts going forward, either new ones or in modified agreements. Employees have a new tool that is potentially powerful and can result in an award of damages, legal fees and other penalties comparable to those available in civil rights cases.
This office is available to both employers as well as employees who wish to discuss and review their employment agreements, draft and negotiate new agreements or who are in litigation concerning the use of any non-compete agreement.
