Employers commonly use non-compete agreements to protect the use of their trade secrets and other confidential business information from employers who leave to join competitors. New York State appears poised to join a number of states in prohibiting such agreements in certain contexts. Specifically, it appears that New York state is about to pass legislation that will invalidate a common contractual agreement, the “no-poach provision,” often found in employer-to-employer business contracts. No-poach provisions restrict employers from soliciting or hiring another employer’s employees or former employees, and proponents of the legislation argue that they restrict the movement and marketability of workers. The New York legislation will not only outlaw no-poach agreements, but will also declare such existing agreements null and void. Reports indicate that this proposed act will be considered before the legislative session ends in a few months in June 2019.
New York State is not the only state moving towards prohibiting such agreements. Massachusetts, Utah and Idaho have already enacted legislation to limit the use of no-poaching agreements, while Pennsylvania and Vermont have also proposed bills to outright ban the enforcement of “no-poaching” agreements between current and former employers.
To ensure that employees harmed by no-poaching agreements have direct recourse to the courts, the proposed New York act allows for a private right of action against employers who have entered into no-poaching agreements. Specifically, it provides that any person who is denied employment or is otherwise damaged because of a no-poaching agreement may recover actual damages, punitive damages, costs of the action, and reasonable attorney fees. To further ensure that employers abide by the proposed act, the bill also provides jurisdiction to the Attorney General to sanction employers who violate the act pursuant to the Attorney General’s powers under section 63, subdivision 12, of the Executive Law.
This trend among the states echoes federal efforts to bar no-poaching agreements. In March 2018, Senators Booker and Warren introduced a federal bill to prohibit agreements between employers that directly restrict the current or future employment of any employee.
Such federal efforts have been ongoing since the Obama administration. In October 2016, the Antitrust Division of the Department of Justice (DOJ) issued guidance stating that an “agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws …” and that “[v]iolations of the antitrust laws can have severe consequences…’”
The Antitrust Division of the DOJ also actively pursues investigations into no-poach agreements between employers, on the basis that they can eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers.
Federal efforts continue and in January 2018, the Antitrust Division reinforced its message that it expects to pursue criminal charges for no-poach agreements entered after October 2016, particularly where deemed not reasonably necessary to separate legitimate business collaboration between the employers. In April 2018, the DOJ filed a civil antitrust lawsuit and simultaneously reached a settlement with two rail equipment suppliers who agreed to refrain from entering, maintaining, or enforcing no-poach agreements with any other companies, subject to limited exceptions (United States v Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation).
Employers based in New York should start reassessing their policies and agreements sooner rather than later given that legislators are likely to consider and may pass the proposed act before this year’s legislative session ends in June 2019. However, if the act passes, even out-of-state employers who find themselves in New York State courts should be aware that (i) courts will likely not uphold no-poaching agreements and (ii) they may also be subject to actions by the State Attorney General.
This proposed legislation reflects a trend in recent public policy that employers need to anticipate when attempting to enforce existing agreements or when entering into future agreements with other employers. While it is not clear if such a public policy concern will generally extend to non-compete clauses in employees’ agreements with employers, employers should carefully consider the language of any type of restrictive covenant provision they use to determine whether it is reasonably necessary to achieve a legitimate business interest and if it may have an impact on the wider market.