States Continue to Target Restrictive Covenants

Connecticut, Indiana, New York, Rhode Island, and Utah are among the latest states to propose further limitations on the use of post-employment restrictive covenants. Connecticut’s House Bill (HB) 6594 and New York’s Senate Bill (S) 3100 would prohibit the use of noncompetes with a wide swath of employees and independent contractors. Indiana’s Senate Bill (SB) 7, Rhode Island’s House Bill (H) 5284, and Utah’s Senate Bill (SB) 170 are more narrow and would only prohibit the use of noncompetes for certain medical professionals.

Connecticut

Connecticut’s HB 6594, titled, “An Act Concerning Noncompete Agreements,” was introduced on February 2, 2023, and is currently pending committee review. The bill would make unenforceable any noncompete entered into, amended, extended, or renewed on or after July 1, 2023, unless the noncompete meets eleven distinct requirements:

• It does not last longer than one year after termination of employment, except where supported by additional, garden-leave compensation, in which case up to two years is permissible.
• It is necessary to protect a “legitimate business interest,” which the bill defines as an interest in “the protection of trade secrets or confidential information that does not qualify as a trade secret” or an interest in “preserving established goodwill with the employer’s customers.”
• It is “no more restrictive than necessary to protect a legitimate business interest in terms of the duration, geographic scope, type of work and type of employer.”
• It applies only to “exempt employees,” who, most notably, include those working in an executive, administrative, or professional capacity exercising discretion and being paid, on a fee or salary basis, more than $400 or $475 per week, depending on the circumstances.
• Notice is provided to the employee “not later than ten business days prior to (A) the worker’s deadline to accept an offer of employment or to enter into an independent contractor relationship, or (B) the date the covenant not to compete is signed, whichever is earlier.”
• It is signed separately from an employment contract.
• The noncompete “contains a statement of the worker’s rights.”
• It provides additional consideration if not executed at the beginning of the employment or independent contractor relationship.
• The employment or contract relationship is not terminated by the worker for good cause.
• It does not require the worker to submit to adjudication outside of Connecticut.
• It “does not unreasonably interfere with the public interest.”

The bill includes a number of other limitations and provisions, including minimum compensation thresholds for the use of noncompetes; a prohibition on courts modifying (for purposes of enforcing) noncompetes that violate the statute; and penalties in addition to reasonable attorneys’ fees, expenses, and court costs, against employers for the use of unenforceable noncompetes.

Importantly, the bill would exclude nonsolicitation agreements, provided they do not restrict worker activities “for more than one year” and are “no more restrictive than necessary in duration, geographic scope, type of work and type of employer.” The bill would also exclude nondisclosure and confidentiality agreements, as well as agreements made in anticipation of the sale of a business or in conjunction with other ownership agreements.

Indiana

Indiana’s SB 7 proposes a complete ban on noncompetes for physicians. The Indiana Senate passed the bill on February 7, 2023, and it has now been referred to the House of Representatives. If passed, the bill would take effect on July 1, 2023.

New York

New York’s S3100, titled, “An Act to Amend the Labor Law, in Relation to Prohibiting Non-Compete Agreements and Certain Restrictive Covenants,” was introduced on January 27, 2023, and is currently pending committee review. The bill would broadly prohibit noncompete agreements and authorize employees to bring civil actions for violations of the statute. Plaintiffs could seek injunctive relief, damages, attorneys’ fees, and/or liquidated damages up to $10,000 against employers that violate the statute.

The bill does contain an exception for agreements that prohibit disclosure of trade secrets, disclosure of confidential information, and the solicitation of clients the covered employee learned about during employment.

Rhode Island

Rhode Island’s H5284, titled, “An Act Relating to Business and Professions—Physician Assistants,” was introduced on February 1, 2023, and is currently pending committee review. The bill would amend existing statutes to prohibit the use of restrictive covenants limiting a physician assistant’s right to practice. The bill specifically calls out noncompetes and patient nonsolicits but would be broadly applicable to any limitation on the right to practice. The only exception is for restrictive covenants used in conjunction with the sale of a practice, provided the covenant is for not more than five years.

Utah

Utah’s SB 170, titled, “Post-Employment Restrictions Modifications,” was introduced on February 2, 2023, and is currently pending committee review. The bill would make void any post-employment restrictive covenant between a health care provider and a health care employee, except a restrictive covenant involving a tuition reimbursement program or other employee incentive or retention program. A “health care provider” is broadly defined but excludes drug manufacturers. A “health care employee” is also broadly defined but excludes employees whose “primary function” is to “perform[] medical or scientific research.”

Key Takeaways

With the Federal Trade Commission’s (FTC) recently issued notice of proposed rulemaking that would ban noncompetes, and the U.S. Congress’s consideration of the Workforce Mobility Act, state legislatures continue to take aim at noncompetes and other restrictive covenants. Employers may want to review carefully their restrictive covenants to ensure continued enforceability and adequate protection for their legitimate business interests.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor legislative and regulatory proposals to limit restrictive covenants and will post updates on the firm’s State Developments and Unfair Competition and Trade Secrets blogs as additional information becomes available. Important information for employers is also available via the firm’s webinar and podcast programs.