Are Noncompete Agreements a Thing of the Past?
Summer Associates Bryce Krieger and Rachael Lipton also contributed to this client advisory.
The short answer is “not yet,” but it looks like we are heading in that direction. In addition to the relatively recent Federal Trade Commission (FTC) proposal and opinion letter from the National Labor Relations Board’s (NLRB) General Counsel, three more states (in addition to California, Oklahoma and North Dakota) have passed legislation that has (or will) significantly restrict the use of noncompete agreements.
On June 20, 2023, the New York State Legislature approved Bill No. S3100A § 191-d(b)(3) (the Bill) containing the broadest ban yet on noncompete agreements, in that it applies to all workers. If/when Gov. Kathy Hochul signs the Bill, it will prohibit employers from seeking or accepting noncompete agreements and certain restrictive covenants with any “covered individual,” possibly including some independent contractors. This would apply to noncompetes established 30 days after the Bill becomes law. There is also a proposed bill that would force employers to rescind existing noncompetes.
The Bill also authorizes employees to sue their employers to void a noncompete agreement and seek damages up to $10,000, lost compensation and attorneys’ fees. An action may be brought within two years of the later of (i) when the prohibited noncompete agreement is signed; (ii) when the covered individual learns of the noncompete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes steps to enforce the noncompete agreement.
Minnesota’s noncompete ban is broad, impacting essentially all noncompete agreements. It specifically applies to covenants that prevent employees from working with another employer for a specified amount of time, working in a specified geographical area, or working in a similar capacity for another employer. However, it carves out exceptions for nondisclosure agreements, nonsolicitation agreements, and noncompetes surrounding the sale or dissolution of a business. Minnesota’s legislation includes a choice of law and venue clause forcing lawsuits based on noncompete clauses, including an employee who primarily resides and works in Minnesota, to be heard in Minnesota, under Minnesota law. This new legislation applies to noncompete agreements entered into on or after July 1, 2023.
Indiana recently passed a ban on noncompete agreements with primary care physicians. This ban applies to noncompete agreements entered into on or after July 1, 2023. It is a complete ban on noncompete agreements with primary care physicians. It is also a ban on noncompete agreements with other physicians under three criteria: 1) the physician is terminated without cause, 2) the physician terminates the physician’s employment for cause, or 3) the employment contract has expired and both parties have fulfilled their obligations. This amended Indiana’s former law that allowed noncompete agreements if they allowed the physician an option to purchase a release from the agreement upon termination. These amendments also created a system governing mediation procedure when physicians exercise their option to purchase a release from a noncompete agreement.
What Should Employers Do Next?
Employers with multi-state operations, and especially those in New York, Minnesota and Indiana, should review their existing agreements and consider revising them. Additionally, employers may want to prepare to stop using noncompete provisions in their employment contracts and consider alternatives like customer nonsolicitation, confidentiality and nondisclosure agreements.
Our Employment and Labor team will continue to share updates as new legislation is brought forth. Please contact your regular AT lawyer or the author listed below for further guidance.