Relates to the state policy against restraint of trade.
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 livelihood. 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.
Often the ability of a business to sue former employees on a non-compete agreement makes it practically impossible for them to earn their livelihood 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 covenant, 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.
2013-2014 Assembly A8490(Steck)
This act shall take effect immediately.
STATE OF NEW YORK ________________________________________________________________________ 7361 IN SENATE May 14, 2014 ___________Introduced by Sen. AVELLA -- read twice and ordered printed, and when printed to be committed to the Committee on Labor AN ACT to amend the labor law, in relation to the state policy against restraint of trade THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. The labor law is amended by adding a new article 32 to read as follows: ARTICLE 32 POLICY AGAINST RESTRAINT OF TRADE SECTION 930. POLICY. 931. PARTICULAR RESTRAINTS OF TRADE UNENFORCEABLE. 932. BALANCING TEST. S 930. POLICY. THE LEGISLATURE HEREBY REAFFIRMS THAT THE POLICY OF THIS STATE IS TO DISFAVOR RESTRICTIVE COVENANTS IN EMPLOYMENT AS CONSTI- TUTING A RESTRAINT OF TRADE. S 931. PARTICULAR RESTRAINTS OF TRADE UNENFORCEABLE. A COVENANT NOT TO COMPETE, OR NON-SOLICITATION AGREEMENT WITH RESPECT TO EITHER EMPLOYEES OR CUSTOMERS, SHALL NOT BE ENFORCEABLE AGAINST A FORMER EMPLOYEE OR AN INDEPENDENT CONTRACTOR WHO IS NO LONGER IN A CONTRACTUAL RELATIONSHIP WITH THE BUSINESS, WHEN ANY ONE OF THE FOLLOWING IS TRUE: (A) SUCH EMPLOYEE OR INDEPENDENT CONTRACTOR HAS BEEN TERMINATED OR DISCHARGED FOR REASONS OTHER THAN MISCONDUCT. (B) SUCH EMPLOYEE OR INDEPENDENT CONTRACTOR: (I) IS NOT UNIQUE; (II) DOES NOT POSSESS TRADE SECRETS OF THE BUSINESS OR MATERIAL THAT IS AKIN TO A TRADE SECRET; (III) HAS NOT PURCHASED OR SOLD ANY PORTION OF THE BUSINESS; AND (IV) IS NOT A LEARNED PROFESSIONAL. (C) SUCH EMPLOYEE OR INDEPENDENT CONTRACTOR IS AN ATTORNEY. (D) THE COVENANT IS UNREASONABLE IN GEOGRAPHIC EXTENT OR IN DURATION BASED ON THE CIRCUMSTANCES OF THE CASE.EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD13245-02-3 S. 7361 2
S 932. BALANCING TEST. WITH RESPECT TO EMPLOYEES WHO, OR COVENANTS WHICH, ARE OUTSIDE THE CATEGORIES DEFINED IN SECTION NINE HUNDRED THIR- TY-ONE OF THIS ARTICLE, SUCH RESTRICTIVE COVENANTS SHALL BE ENFORCED ONLY WHEN THE LEGITIMATE INTEREST OF THE EMPLOYER OUTWEIGHS THE EMPLOY- EE'S OR INDEPENDENT CONTRACTOR'S INTEREST IN BEING ABLE TO PURSUE HIS OR HER LIVELIHOOD AND THE PUBLIC INTEREST IN FREE AND OPEN COMPETITION; AND SUCH RESTRICTIVE COVENANTS SHALL BE ENFORCED ONLY TO THE EXTENT NECES- SARY TO PROTECT THE EMPLOYER'S LEGITIMATE INTEREST. S 2. This act shall take effect immediately.