Are non-compete agreements on the way out?

Print More
Jeremy M. Sher

Requiring new employees to sign non-compete agreements is a common practice. Often lasting at least a year, non-competes prevent employees from working for competing businesses after leaving their current jobs. Workers who violate non-competes risk lawsuits for money damages and injunctions—binding court orders—forcing them out of their new jobs. About 30 million Americans, or one in five workers, has signed a non-compete. In New York, approximately 44 percent of employers impose some form of non-compete.

That percentage might drop in the coming years as New York courts and legislators, as well as the Federal Trade Commission, appear increasingly united behind banning non-competes for most employees.

Non-competes today: courts in control

Despite the prevalence of non-competes, no statutes or regulations currently govern their use in New York. Instead, judges create tests to decide whether employers may enforce non-competes against former employees in court. Judges rely on these precedents when employers ask courts to order employees to stop competing and employees ask courts to strike down non-competes as unenforceable.

The most important of these precedents is the 1999 decision of New York’s highest court, the Court of Appeals, called BDO Seidman v. Hirshberg. The BDO Seidman court explained that to be enforceable, non-competes must satisfy several requirements that include being reasonable in duration, reasonable in geographic scope, and limited to protecting the employer’s legitimate interests. The court identified legitimate employer interests as the safeguarding of trade secrets—information that the employer develops for its own benefit, uses to gain a commercial advantage, and does not disclose to competitors or the public—and protection against competition by “unique or extraordinary employees.”

In the following decades, New York courts fleshed out the BDO Seidman decision to make the law of non-competes more predictable, especially regarding the concept of unique or extraordinary employees. More recent decisions established a pattern of refusing to enforce non-competes for most employees, even rejecting a choice-of-law clause that sought to impose a more employer-friendly state’s laws.

In particular, courts narrowed the definition of unique or extraordinary employees to workers who were irreplaceable due to their one-of-a-kind skills or special relationships with a significant portion of the employer’s clients. Courts also clarified that knowledge of an industry or an employer’s pricing and general strategies, awareness of publicly-available client information, and high value to employers as proficient and experienced workers did not render employees unique or extraordinary.

Employers often cannot enforce non-competes because they cannot prove their employees pose a danger of trade secret misappropriation or qualify as unique or extraordinary. Further, without advice from legal counsel, it is challenging for employers to know the criteria for enforcing non-competes as the sole source for such criteria is judicial decisions. The result is that while non-competes remain common in New York, courts are more likely to strike them down than enforce them against employees. That fact is not always helpful to employees, who may lack the resources to hire litigation counsel when employers threaten or bring lawsuits. At the same time, employers who sue former employees bear the risk of a decision declaring their non-competes unenforceable, which could have companywide consequences.

Promise of legislation in 2024

The New York Legislature took action on non-competes in 2023, passing a bill that would have banned non-competes and allowed employees subject to prohibited non-competes to sue their employers for lost compensation, attorneys’ fees, and liquidated damages of up to $10,000 per employee. Gov. Kathy Hochul vetoed the bill on Dec. 22, calling it overbroad and inviting the Legislature to propose a less-sweeping ban.

Hochul appears interested in creating a compensation floor for non-competes, an approach that would overrule the BDO Seidman decision and permit non-competes for employees whose compensation exceeds a statutory minimum. Depending on where the Legislature and governor set this minimum, a new law could widen or narrow the range of enforceable non-competes. Use of a compensation test will likely trigger a lobbying tug of war, with employer-side interests seeking to lower the compensation threshold and employee-side groups seeking to raise it.

While we do not know the timing and contents of a compromise bill yet, the end result will likely transform the state of non-competes in New York.

The FTC weighs in

In addition to the Legislature, businesses should keep an eye on the FTC. In January, the FTC proposed a rule that would ban most non-competes as unfair methods of competition. The rule would require employers with covered non-competes to notify affected employees that their non-competes are unenforceable. The rule followed President Joe Biden’s 2021 executive order directing the FTC “to curtail the unfair use of non-compete clauses.”

As with New York’s potential non-compete ban, we do not know when the FTC will vote to adopt a final rule or the extent of any changes to it. Further, given the Supreme Court’s pattern of limiting the powers of federal agencies like the FTC, business groups will undoubtedly seek to tie up and invalidate a final rule in court. A Republican win in the 2024 presidential election could also delay or eliminate the rule.

Where things stand

With the possibility of new state legislation and FTC regulation, 2024 could see drastic changes to the law of non-competes. In the meantime, New York courts have ruled that employers cannot enforce non-competes except to protect against the loss of trade secrets or an employee’s unique or extraordinary services. Non-competes are already in a weak position in the courts. Whether a new law or rule further restricts non-competes remains to be seen.

Jeremy M. Sher is senior counsel in the Rochester office of Bond, Schoeneck & King PLLC, where he specializes in business and commercial litigation. View his profile here. The Beacon welcomes comments and letters from readers who adhere to our comment policy including use of their full, real name. Submissions to the Letters page should be sent to [email protected]

One thought on “Are non-compete agreements on the way out?

  1. Isn’t this another slap in the face to business in NYS? Non-disclosure agreements (NDAs) have already been demonized as “hush-money” by the AG, now Albany is going after non-compete-agreements? So the Gov thinks they are ok above a certain income level? (is this another DNC based on “ability-to-pay” initiative?). In other-words, its ok for you to accept a not-to-compete clause but illegal for me to? As usual, I doubt Albany has considered all of the facets of this. Its been my experience that many companies ask for acceptance of these conditions before releasing a $everance package. So what happens now, do employers just stop paying severance (since they will be giving up all resemblance of legal protections) ? What if I successfully start (fictitious example ) the Acme Co on the street corner, I want to sell the biz, I find a buyer, he’ll want me to sign a not-to-compete at a minimum so I don’t open the same biz across the street? I just see this as another impediment to doing business in NYS (and another reason for business and people to leave the State). The Gov appears to have had a random act of thoughtfulness here with her veto (probably had a remorseful Scrooge moment thinking about where all of the future tax revenue will come from……..)

Leave a Reply

Your email address will not be published. Required fields are marked *