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Could legislation limiting non-compete agreements kick off a new era of workplace disputes?

A mainstay of employment-based litigation – non-compete agreements – is on the proverbial chopping block.

Earlier this year, New York State Assembly passed Bill S3100A. This bill would amend the New York State Labor Law (NYLL) by adding a new Section 191-d that, once signed into law, could prohibit (and void) nearly all non-competes that are entered into or modified after the effective date of the law (30 days after Governor Hochul’s signature).

The proposed legislation follows on the heels of both a rule proposed by the Federal Trade Commission (FTC) that would retroactively ban non-compete agreements as an unfair method of competition, and a memorandum published by the General Counsel to the National Labor Relations Board (NLRB) that asserts that most non-compete agreements already violate Section 7 of the National Labor Relations Act (NLRA).

By way of background, a “non-compete” is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer. Many non-competes specify a time period during which the employee is barred from working for a competitor or in a certain industry after they end employment. Although they take many forms, these agreements also generally include a clause prohibiting the employee from revealing proprietary information or trade secrets to others during or after employment, or from soliciting an employer’s other employees or customers.

Historically, non-compete agreements have been “disfavored” in New York but may be enforced by courts if properly tailored to: (1) a reasonable time period and geographic scope; (2) protect the employer’s legitimate interests; (3) impose no undue hardship on the employee; and (4) not harm the public. To that end, an employer’s legitimate interest can include protecting its trade secrets and confidential information and preventing employees from taking specialized skills they gained on the job to a competitor. Essentially, a non-compete’s restrictions must be no greater than necessary to protect the legitimate interests of the employer.

Bill S3100A, which was passed after the conclusion of the 2023 legislative session, would prohibit almost all non-compete agreements for all employees, regardless of their salary level or job function. There are a few express exceptions to this near-total ban, so long as the agreements do not “otherwise restrict competition” in violation of the proposed law, including agreements that: establish a fixed term of service; prohibit disclosure of trade secrets or confidential and proprietary information; or agreements that prohibit solicitation of clients learned about during employment.

Remedies against employers attempting to impose or enforce banned non-competes under the proposed law include injunctions, attorneys’ fees, liquidated damages up to $10,000, and lost compensation. Claims may be brought within two (2) years of signing a non-compete, the end of employment, or the attempted enforcement of the agreement.

On the federal level, the FTC is considering a broad, fully retroactive non-compete ban. Under its proposed rule, the FTC would make it unlawful for an employer to enter into, or attempt to enter into, or maintain a non-compete agreement with an employee or represent to an employee that they are subject to such an agreement where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause. Unlike Bill S3100A, the FTC’s rule contains an exemption for a “substantial owner of, or substantial member or substantial partner in” a business entity that has been sold where the non-compete provisions are an aspect of the sale.

In May 2023, the NLRB also stated that non-competes are already illegal under the NLRA. In a widely circulated memorandum, NLRB General Counsel Jennifer Abruzzo explained that non-compete agreements are unlawful because they “chill” employees from exercising their NLRA Section 7 rights to take collective action in improving working conditions. Specifically, General Counsel Abruzzo stated that, “[n]on-compete provisions reasonably tend to chill employees in the exercise of Section 7 rights when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”

General Counsel Abruzzo continued, “This denial of access to employment opportunities interferes with workers engaging in Section 7 activity in a number of ways – for example, workers know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; their bargaining power is undermined in the context of lockouts, strikes and other labor disputes; and their social ties and solidarity leading to improvements in working conditions at workplaces are lost as they scatter to the four winds.”

Similar to the FTC’s proposed rule, however, General Counsel Abruzzo identified an exemption for individuals with managerial or ownership interests in a business or true independent-contractor relationships. Moreover, there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights may be justified by special circumstances.

While the enactment of these rules could render non-compete agreements an increasingly archaic subject matter for litigation, they could also usher in a new era of workplace disputes. Non-compete litigation currently generally involves employers attempting to enforce and prosecute alleged breaches of these restrictive covenants. Should the state and federal bans go into effect, party designations in lawsuits are likely to shift with employers finding themselves increasingly cast in the role of defendant.

Although it is anyone’s guess as to when Bill S3100A will be signed into law, it is anticipated. Enactment (and enforcement) of the current FTC proposal and enforcement of the NLRB policy stance are also expected. The bottom line is that employers should begin compiling lists of operational non-competes and revisit form employment (and severance) agreements now to limit potential litigation claims down the line.

Ryan T. Biesenbach is an Associate in Underberg & Kessler’s Litigation and Labor & Employment Practice Groups.