NY AG Targets Non-Competes: What This Means For Employers

NY AG Targets Non-Competes: What This Means For Employers

The New York Attorney General’s Office turned some heads this summer when it reached settlements with multiple companies over the use of non-compete agreements with respect to lower-level employees. The issue appears to have become a point of emphasis for Attorney General Eric Schneiderman, who is authorized under Section 63(12) of the New York Executive Law to investigate “unconscionable contractual provisions.” Going forward, employers should give careful consideration to the inclusion of non-compete provisions in contracts with rank-and-file workers.

In one example, the Attorney General’s office reached an agreement with Law360, a prominent legal news website. Law360 required its editorial staff to sign an employment contract with a provision that prevented them from working for any media outlet that provides legal news for one year after leaving the company. As part of the settlement with the Attorney General, only a handful of Law360 executives will be required to sign non-compete agreements going forward.

Just days after announcing the settlement with Law360, Schneiderman said a deal had been reached with sandwich chain Jimmy John’s to stop including sample non-compete agreements in hiring packets it sent to its franchisees. The agreements required workers to wait at least two years after leaving Jimmy John’s before working at a competitor, which the company defined as an establishment located within two miles of a Jimmy John’s location and made over 10% of its revenue through sandwich sales.

In both cases, the Attorney General focused on non-compete agreements with lower-level employees, whom Schneiderman claimed had little to no knowledge of trade secrets or confidential information. The Attorney General did not challenge the use of such provisions in contracts with certain senior personnel who were more likely to have access to that type of information.

The Attorney General’s actions appear to be part of a larger trend. Recent reports from the U.S. Treasury Department and the White House found non-competes can hurt “worker welfare, job mobility, business dynamics, and economic growth more generally.” Like New York, some states, including California, have laws that sharply limit the use of non-compete clauses. Other states have similar bills pending.

What This Means

New York Employers should consider abandoning the use of non-compete agreements for low level workers and non-managerial staff. Such provisions are more likely with withstand scrutiny when included in contracts with senior personnel. Even then, companies should make sure their non-competes are narrowly tailored to protect legitimate business interests, such as protecting trade secrets, customer relationships or other confidential information. Non-competes must also be reasonable, i.e. necessary to legitimate company interests but not causing an unreasonable burden to the employee.

It is worth noting that, at least to date, the New York Attorney General’s Office has not challenged other restrictive covenants, including provisions that restrict a departing employee from soliciting a company’s employees and clients. Non-solicitation clauses are generally enforceable in New York, provided they are limited in time and scope. Companies should also feel comfortable using confidentiality provisions that protect against disclosure of trade secrets and other confidential information, which have been outside the Attorney General’s focus.

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