Relates to the state policy against restraint of trade

BILL NUMBER:S7361

Title of bill

An act to amend the labor law, in relation to the state policy against restraint of trade

Purpose or general idea of bill

The bill clarifies the law of non-compete agreements which has become confusing in light of the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). That decision established a balancing test in which the employer's interest in enforcing the covenant was balanced against the employee's interest in earning his or her liveli- hood. Unfortunately, some Courts have interpreted the balancing test as applying in all cases, rather than applying only to employees who were not within categories-long considered to be exempt from such restrictive covenants. The bill restores the law so that lower level employees and independent contractors cannot be subjected to restrictive covenants.

Summary of provisions

The bill establishes clear categories in which restrictive covenants are not enforceable:

1) An employee terminated for reasons other than misconduct. The Court of Appeals has clearly held that the consideration for a non-compete is the promise of future employment not past services rendered. Hence, when an employee is terminated, and future employment is no longer offered, a non-compete cannot be enforced. Morris v. Schroder Capital Mgmt. Intl, 7 N.Y.3d 616, 621 (2006)

2) Employees who are not unique. A unique employee is one who possesses trade secrets or material that is akin to a trade secret. Cool Insuring Agency, Inc. v. Rogers, 125 A.D.2d 758 (3d Dep't 1986).

3) An employee who has purchased or sold a share in the business. As a condition of allowing someone to become an owner of a business, or when selling ownership of a business, the business has an interest in preventing the purchaser or the seller from competing and undermining the viability of the business.

4) Learned professionals such as physicians have always been permitted to enforce non-compete agreements.

5) Non-competes against attorneys are unenforceable due to the client's right to counsel of his or her own choosing.

6) Covenants that are unreasonable in geographic extent or length of years. The bill relies on existing case law to define what is meant by "unique employee," "trade secret," and geographical or durational reasonableness. The bill reserves the balancing test of the BDO Seidman case only for use in circumstances which do not involve one of the

historic categories in which non-competes were unenforceable as a restraint of trade.

Justification

Often the ability of a business to sue former employees on a non-compete agreement makes it practically impossible for them to earn their liveli- hood free of economic coercion. If the rules of law become muddled, and cases which lack merit are not dismissed at the outset, former employees are forced to incur substantial legal defense costs, often running into the tens of thousands of dollars, with the end result that the former employee is economically punished for having signed a restrictive coven- ant, or deterred from employment in his or her chosen field, even though the restrictive covenant is ultimately found unenforceable. Thus, it is imperative that rules of law in this field be clear and concise, as lack of clarity leads to oppression and injustice.

Legislative history

2013-2014 Assembly A8490(Steck)

Fiscal implications

None.

Effective date

This act shall take effect immediately.