On June 20, 2023, the New York State Assembly passed A1278B, which amends the state’s labor law to prohibit non-compete agreements (the “Bill”). The Assembly’s passage of the Bill, which comes on the heels of the New York State Senate’s June 7 passage of the Bill’s counterpart, is now headed to Governor Hochul’s desk for signature. Assuming Governor Hochul signs the Bill, the Bill will become effective thirty days after it becomes law and will apply to any contract entered into after the effective date. This Bill is part of a larger trend towards subjecting non-competes to heightened scrutiny or outright prohibition that is occurring at the state level, federal level and even internationally.
The Bill prohibits non-compete agreements and authorizes “covered individuals” to bring a civil action against any employer or person for violating the prohibition. “Covered individuals” includes not only employees, but also independent contractors and consultants. Unlike the non-compete bans recently passed in states such as Illinois and Washington, the Bill is not limited to workers earning less than a given threshold and would instead apply to all workers in all sectors.
The Bill defines “non-compete agreement” 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.” Notwithstanding this definition, the Bill separately states 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.” This language, which mimics the language in California’s statute limiting non-competes, may serve to prohibit non-compete agreements even outside the employment context, including in the context of a sale of business (for which California includes an express exception).
The Bill explicitly states that it does not regulate the ability of an employer to enter into contracts for fixed terms of service, nor does it prohibit covenants related to confidentiality, protection of trade secrets, non-disclosure of proprietary client information or non-solicitation of the employer’s clients—provided that the agreement does not “otherwise restrict competition in violation of [the Bill].” The Bill does not explicitly address agreements not to solicit employees or other service providers, which have historically been enforceable under New York law.
The Bill establishes a private cause of action for any covered individual to invalidate a non-compete covered by the Bill. The cause of action has a two-year statute of limitations running from the latest of: (1) when the non-compete was signed, (2) when the covered individual learns of the non-compete, (3) when the employment or contractual relationship is terminated and (4) when the employer takes steps to enforce the non-compete. Any court to which a claim is brought will have the authority to void the non-compete, order injunctions against employer conduct, order payment of liquidated damages and award damages including lost wages and reasonable attorneys’ fees and costs. Liquidated damages under the Bill are not to exceed ten thousand dollars per covered individual, and the Bill declares that courts shall award liquidated damages to every affected covered individual.
Although broad in scope, the Bill leaves open a number of interpretative questions, which will likely be resolved through regulations promulgated by the New York State Department of Labor or through litigation. Many of these issues are particularly acute in the context of equity awards, which often contain non-compete clauses.
Employee Choice Doctrine. Courts applying New York law have generally accepted the “employee choice doctrine,” a common law rule exempting agreements from non-compete scrutiny if a worker would forfeit certain benefits should the worker compete with the employer after termination but is otherwise not restrained from competing. Courts will have to rule on whether such employee choice provisions are agreements that “prohibit or restrict” the covered individual from obtaining employment for purposes of the Bill.
Garden Leave. One common technique that employers utilize in lieu of or as a supplement to non-compete covenants, is an extended notice period prior to termination during which the worker remains employed and collects regular salary and benefits, but the worker may be asked not to report to work during the time—often called “garden leave.” While the Bill does not squarely address garden leave provisions, it is likely that garden leave will remain lawful after the Bill comes into effect, because such a contractual provision would be considered an agreement for a fixed term of service.
Sale of Business Exception. Although the Bill defines “Non-Compete Agreement” as an agreement between an employer and a worker, separate language in the Bill suggests it may have broader implications. Section 3 of the Bill, for example, states 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.” As a result, non-compete provisions in transaction agreements may also be void under the Bill. Notably, California’s non-compete ban includes that same “every contract” language but also includes an express carve-out when the non-compete is entered into in the context of a business sale. No such exception exists in the Bill.
Choice of Law Provisions. Under New York law, contracting parties generally are empowered to choose which state’s substantive law applies to their contract if there is a “substantial relationship” between the dispute and the chosen state, and applying the law of the chosen state does not contravene a fundamental policy of the state with a materially greater interest in the dispute. Accordingly, New York courts are highly deferential to a contract’s choice of law provision so long as the choice of another state’s law is valid under the substantial relationship test and its application does not violate the public policy of New York. The Bill would seem to express unambiguously a strong New York public policy against noncompete agreements, and litigation in coming years is likely to establish the extent to which the Bill will be applied to prohibit the enforcement of noncompete covenants in contracts with non-New York governing law clauses. Factors that we expect will be relevant to the courts’ decisions include whether the employer is incorporated, headquartered or doing business in New York; whether the worker is a resident of, or was providing services in, New York and whether the alleged competitive activity is occurring in New York. The prevalence of remote work will add additional complexity to the courts’ analyses.
The Bill is part of a larger nationwide movement prohibiting or greatly restricting the use of non-competes. The FTC made headlines earlier this year when it announced a proposed rule that would declare all non-competes to be unfair methods of competition in violation of Section Five of the Federal Trade Commission Act (the “FTC Rule”). While the FTC Rule is likely to be revised prior to its effective date, the FTC Rule as currently published would effectively ban all non-competes, with the only exceptions being for the sale of companies or for industries outside the FTC’s jurisdiction. The General Counsel of the NLRB has also recently published a memorandum advising its local regional offices that they should treat non-compete agreements as violating Section 8(a)(1) of the National Labor Relations Act unless they are narrowly tailored to account for special circumstances.
In addition to federal agencies, there has been a growing movement in state legislatures to ban or restrict the use of non-competes. Minnesota just passed its own ban on non-competes, set to take effect July 1 of this year, the fourth state to enact an outright ban on non-competes. Upon the signing of the Bill, New York will be the fifth state on this list. In addition to these states with outright bans on non-competes, many other states have recently enacted significant restrictions on non-competes, such as only allowing them for workers earning above a specified threshold.
The Bill is a sweeping restriction, banning what would seem to be all non-competes entered into after the effective date. However, the language of the Bill is brief, and the full contours of the law will almost certainly be subject to litigation. New York State employers, as well as employers with significant operations or workers in New York State, should consider the implications of the Bill on their non-compete practices and consider what changes may need to be made going forward.
 Choice of law clauses often provide that the contract will be governed by and construed under the laws of a specified state, “without giving effect to the conflict of laws principles thereof” or similar language.
 The other states with outright bans on non-competes are California, Oklahoma and North Dakota.