What is a non-compete agreement?
A non-compete agreement is a contractual provision that prohibits an employee from working for a competitor or opening a competing business after they leave a job. It can be a stand-alone agreement or part of another contract that the employee signs before or during their employment with the employer. A non-compete agreement is not a non-solicitation agreement, a confidentiality/trade secret agreement or a paid training/education claw back agreement, however, they are often used in combination with one another.
What happened to the FTC and New York State bans on non-compete agreements?
It has been an eventful year for those following legal developments relating to non-compete agreements. A rule issued by the Federal Trade Commission banning, with limited exceptions, the use of the popular employment clause was set to go into effect on September 4, 2024. However, a federal district court in Texas recently found the FTC non-compete ban to be unlawful. Specifically, on August 20, 2024, the U.S. District Court for the Northern District of Texas ruled that the FTC exceeded its statutory rulemaking authority with respect to “unfair methods of competition” in issuing the non-compete ban and held that the rule was “arbitrary and capricious.” The court specified that its holding has nationwide effect. (A copy of the court’s decision in Ryan, LLC v. Federal Trade Commission may be found here).
In addition to monitoring regulatory activity at the federal level, New York employers should be mindful of New York legislation. In late December 2023, Governor Hochul vetoed a proposed bill (Assembly Bill A.1278B and Senate Bill S.3100A) that would have effectively banned all new non-compete provisions in New York. The Governor signaled her openness to signing a more balanced bill that would limit non-compete agreements for middle-class and low-wage workers while protecting companies that have a legitimate need to enter into non-compete agreements with higher-income workers.
So, what do these developments mean for employers and employees in New York? In short, it means a return to the status quo.
What is the status quo in New York?
The Courts in New York have indicated that non-compete clauses in employment contracts are generally not favored and will only be enforced to the extent they are reasonable and are necessary to protect valid business interests.
Under the current law in New York, Courts have found non-compete agreements to be legal and enforceable as long as they:
- Serve a legitimate business interest;
- Are reasonable in time and geographic reach;
- Are not harmful to the general public; and
- Are not unreasonably burdensome (creating an undue hardship) on the employee.
These factors must be analyzed on a case-by-case basis. The enforceability of a non-compete clause may also be affected by other factors, such as where an employee with a non-compete clause is terminated without cause and whether the employees are “rank and file” or have specialized skills.
What’s next for Non-Compete provisions in New York and nationally?
The Texas Federal District Court’s recent injunction blocking the FTC non-compete ban alleviates some immediate uncertainty facing employers regarding the use and enforcement of non-compete agreements while the law works its way through the court system. An FTC spokesperson indicated the agency is considering an appeal of the decision handed down by the District Court in Texas. There are also lawsuits currently pending in other Federal District Courts, including in Pennsylvania and Florida, which seek to stop the FTC’s enforcement of the rule. Although the litigation is ongoing, the circumstances are setting up for a split of authority among the federal appellate courts making it highly likely that the cases will go to the U.S. Supreme Court for a final decision.
In New York, there is still the possibility that the New York legislature will seek to introduce a more narrowly tailored non-compete ban that Governor Hochul would be willing to sign into law. To date, revised bills have not been introduced by either the New York State Assembly nor the New York State Senate. Regardless of what happens in New York, New York employers with employees outside of New York must also ensure they comply with any restrictions on non-compete agreements that apply to employees in other states. There are currently four states that completely ban non-competes (California, Minnesota, North Dakota and Oklahoma) and another 33 states plus the District of Columbia who impose restrictions on their use. Some states even impose civil and criminal penalties when they are used in violation of the state law.
What does that mean for you?
For the present time, non-compete agreements in New York are enforceable, provided they are reasonable in scope and are necessary to protect a valid business interest. There is also currently no enforceable national ban on non-compete agreements but the non-compete laws differ from state to state. State laws related to non-compete agreements and their enforcement need to be carefully considered on a case-by-case basis to ensure compliance.
Employers should consult with employment counsel to ensure that their non-compete agreements comply with applicable federal and state law and offer sufficient protection for their specific business.
Written by Nicole Marlow-Jones and Christen D. Santiago