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Seyfarth Synopsis: Efforts to prohibit non-compete agreements in New York State are back to square one following Governor Hochul’s veto of an outright ban in late December 2023.

As we reported most recently here, New York was set to join a number of states that prohibit non-compete clauses in employment agreements. In June 2023, the Legislature passed a bill that would have declared an outright ban on such agreements, with no exceptions, but its formal “delivery” to the Governor was delayed due to well-publicized concerns that the bill was too draconian, including, among other concerns, that it applied to all workers regardless of income and did not permit non-competes as a term of the sale of a business. 

Continue Reading New York Non-Compete Ban is Off the Table—For Now
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On November 30, 2023, Governor Kathy Hochul answered the long-awaited question of whether New York would join California, North Dakota, Oklahoma and, most recently Minnesota, as a state banning the use of non-compete agreements between employers and employees. While New York legislators passed a bill to do just that in June, yesterday, Governor Hochul announced that she would not be signing it.

As we previously addressed, New York’s proposed ban left open a number of questions regarding how broadly the ban would apply, including whether non-solicit clauses would remain viable. In speaking to reporters, Governor Hochul expressed concern regarding another point of overbreadth — that the proposed ban failed to strike the right balance between protecting low and middle-income workers while recognizing that higher-income workers have more negotiating power with employers.  Preliminarily, Governor Hochul suggested a minimum salary of $250,000 as a potential starting point for when employees could be subject to non-competes. 

Based on Governor Hochul’s comments, we may see New York adopt the model of many other states that have instituted minimum income thresholds necessary for employers to be able to enforce non-competes. Given the approximate $2 trillion size of New York’s economy, its actions have outsize influence. We will continue to monitor New York’s next steps.

Background

On September 15th 2023, Governor Kathy Hochul signed into law an amendment to the New York Labor Law. The amendment adds a new Section 203-f to the Labor Law, which addresses the assignment of inventions made by employees. Under this law, employment agreements can no longer include provisions that assign, or provide that an employee offer to assign, any of their rights in an invention if the employee developed the invention on their own time and without the use of their employer’s resources and trade secrets. The new law exempts certain inventions, namely those that: (1) at the time the invention was conceived, related to the employer’s business or its anticipated research and development; or (2) result from work performed by the employee for the employer. On its face, SB 5640 does not appear to apply retroactively. Instead, the language suggests that invention-assignment provisions in employment agreements executed on or after September 15, 2023, are unenforceable unless they comport with the new law.

Open Questions

The new law leaves a number of open questions. Employers may wonder, what constitutes an “invention”? The statute does not define the term and courts have not yet addressed its scope and extent. Commentators are already split as to whether an “invention” is limited to patentable ideas, or whether an “invention” includes a broad scope of intellectual property rights such as trademarks or copyrightable works. Conceivably, courts may also be split, and the issue could prove to be a battleground during litigation. Another open issue is that SB 5640 does not create an express private right of action. At the very least, the law will be enforced by the New York Department of Labor. But courts may interpret the new law as permitting a private right of action as well. Given that invention agreements are also often accompanied by non-disclosure covenants, employers may face additional challenges enforcing such covenants that are coupled with a non-compliant assignment provision.

What Does this Mean for Employers?

Employers should keep several things in mind as they consider this new law. In a post-COVID world, a quantified measurement of an employee’s own time may be difficult to determine. Hybrid and remote work have blurred the lines between working hours and personal time. Courts in jurisdictions with similar laws, like California, have looked at evidence from both parties to determine an accurate timeline of an invention’s conception. Accordingly, it is important for employers to keep detailed records, log network activity, and set clear guideposts for what constitutes working time. Employers should mandate that all company work be performed on company issued devices, and establish a policy that all employee work product contained on company devices is considered company property. Employers and employees should also understand that even inventions made during an employee’s own time are assignable if it relates to the employer’s business at the time of conception or is the result of work performed by the employee specifically for the employer.

Employers should acknowledge the effects of SB 5640 and how it may impact their hiring process, as well as creativity and innovation in the workplace. Employers who require assignments during the interview process, prior to even hiring an individual, should consider the impact of this new law on those procedures. Employers should also set expectations with prospective employees about what inventions or other matters might be subject to assignment. Employers should further give thought to how the new law will affect their team’s brainstorming practices and elevation of ideas.

Conclusion

Despite some open questions, the new law clearly will require changes to some assignment provisions in employment agreements. Employers in New York or with New York offices should consider reviewing their current employment agreements that include invention or IP assignment provisions and update or create policies that require employees to disclose all inventions made or conceived by an employee prior to their employment.

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Following the recent passage through the New York State Senate, on June 20, 2023, the New York State Assembly voted to approve a bill, which, if enacted, would ban all post-employment non-compete agreements. We previously reported on the key features of Senate Bill S3100A here. Assembly Bill A1278 is now headed to Governor Hochul’s desk for review, and she has 30 days from receipt to consider the Bill. Given her 2022 State of the State agenda in which Governor Hochul explicitly wrote in favor of legislation to eliminate certain non-compete agreements, expectations are that she will sign the Bill into law. While several states have recently enacted legislation placing income restrictions on non-competes, New York is poised to prospectively ban all employee non-competes regardless of income, making it the fifth state to do so after California, North Dakota, Oklahoma, and Minnesota. We will continue to monitor and report on any further developments.

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New York is poised to join the growing number of states enacting legislation to curtail the use of non-compete agreements by employers. On June 7, 2023, the New York State Senate voted to pass Bill No. S3100A, which, if enacted, would ban all post-employment non-compete agreements, along with Bill No. S6748, which is generally aimed at preventing the establishment of monopolies, monopsonies, and restraints of trade by, among other things, curtailing  the use of non-compete agreements. The Bills are currently awaiting passage by the New York State Assembly and are expected to be signed by Governor Kathy Hochul.

Continue Reading New York State Senate Approves Bills Banning Use of Non-Compete Agreements

On March 8, 2022, Excel Sports Management, LLC commenced an action in the Supreme Court of New York, Commercial Division, alleging that its former Vice President of Basketball Partnerships, Eric Eways, resigned his employment in favor of employment with Klutch Sports Group, LLC, in violation of a restrictive covenant in his employment agreement. The non-compete, governed by New York law, prohibited Eways from working for Klutch and other specifically-named competitors for eight months post-separation.    Continue Reading New York Appellate Court Reverses Lower Court’s Denial of Preliminary Injunction and Enjoins Former Employee from Working with Rival Sports Management Agency

The New York State Legislature is keeping busy with new employment legislation as the local and national economies continue to recover from the COVID-19 pandemic.

On April 21, 2021, both houses of the Legislature announced passage of portions of the NY Hero Act, which requires extensive new workplace health and safety protections in response to the pandemic. The Legislature is also advancing two additional employment-related bills: one would ban “no-rehire” clauses in employment settlement agreements, and the other would prohibit “no-poach” agreements between franchisors and franchisees. Continue Reading New York State Enacts Worker Safety Legislation and Considers Other Employee-Friendly Bills

Manhattan restaurant Sottolio, Inc., d/b/a Norma Gastronomia Siciliana hired Giuseppe Manco—“a noted  Italian pizza chef, or pizzaiolo”—to consult on its menu. At the same time, Manco and his wife purchased a 9% interest in the restaurant, becoming co-owners of the business. Manco signed a non-compete and non-disclosure agreement in connection with his hiring, under which Manco agreed, for ten years, to not replicate, copy, or duplicate Plaintiff’s confidential information, including its “signature recipes” for arancine, pasta alla norma, caponata, anelletti al forno, and carbonara di mare, or to use the signature recipes within a ten mile radius of Sottolio’s Manhattan restaurant.  Continue Reading Fettucine Al Fraudo—New York Pizzaiolo in Hot Water After Alleged Theft of Secret Pasta Recipe

Seyfarth Partners Erik Weibust and Jeremy Cohen participated in the American Intellectual Property Law Association’s 2019 Trade Secret Law Summit on March 21 and 22 at American Express’s corporate headquarters in New York.  Erik serves as Vice Chair of the AIPLA’s Trade Secret Committee and a member of the planning committee for the Summit, which addressed a range of topics related to trade secret protection across a wide array of industries.  Erik spoke on a panel on Protection of Trade Secrets in the Social Media Era, alongside in-house counsel from Lockheed Martin and Hanzo.  Jeremy spoke on a panel on Trade Secrets and Restrictive Covenants in the Financial Services Industry, which Erik moderated, along with counsel from Morgan Stanley Wealth Management and Brown Brothers Harriman.  Approximately 80 attendees from across the country, comprised of in-house counsel, outside counsel, and government and judicial officials, took part in the Summit, including Seyfarth attorneys Kate Perrelli, Dawn Mertineit, and James Yu.

By Marcus Mintz

A New York Supreme Court recently affirmed the viability of the “employee choice doctrine” in a rescission action involving employee equity grants.  See Lenel Systems Int’l., Inc. v. Smith, 106 A.D. 3d 1536, 966 N.Y.S.2d 618 (N.Y. App. Div. 2013).  The “employee choice doctrine” arises when an employee has a choice between complying with post-employment obligations, such as a non-compete or non-solicitation agreement, or risk forfeiting certain benefits, such as equity grants.

Generally, post-employment restrictions will be reviewed by a court for reasonableness and are disfavored as a restraint on an employee’s ability to earn a living.  When an employee is given the choice of compliance or forfeiture of benefits, however, “there is no unreasonable restraint upon an employee’s liberty to earn a living” as a matter of law.  Put simply, if an employee can choose whether or not to comply with a restrictive covenant, then there is no “unreasonable restraint” on the employee’s ability to earn a living.

The New York Supreme Court was recently asked to consider the application of the employee choice doctrine to an action for rescission of stock options granted to an ex-employee, Smith, based on his alleged breach of a non-compete provision in the stock option agreement.  While employed at plaintiff Lenel Systems International, Inc., Smith was granted stock options.  The stock option agreement required that, as a condition of the grant, Smith would not compete with Lenel while employed and for two years following his termination from employment.  Smith voluntarily terminated his employment and assumed employment with an alleged competitor. 

Lenel filed a lawsuit against Smith, alleging that he was violating the non-compete in his stock option agreement and seeking rescission of the stock options.  Smith moved for summary judgment on Lenel’s claim for rescission, arguing that the restrictive covenants in the stock option agreement were unreasonable and, therefore, unenforceable as a matter of law.  While the court acknowledged the general policy of disfavoring restrictive covenants against employees, it held that such policy did not apply to the facts in Lenel Systems because the employee had a choice between compliance and forfeiture.  In addition, the court held that when the “employee choice doctrine” applies, a restrictive covenant will be enforceable “without regard to reasonableness” provided that the employee voluntarily terminated his or her employment.

In addition to other tools an employer may use to protect its business interests, enforcing restrictive covenants contained in equity grants through actions for enforcement of express forfeiture provisions may provide an effective mechanism for retaining employees.  However, employers must be mindful that any inducements to comply with restrictive covenants must be sufficiently lucrative to ensure employee compliance.