The New York Attorney General’s Crackdown on Non-Compete Agreements: What It Means for Investment Managers

Jul 29, 2016

Reading Time : 3 min

First, on June 15, 2016, the NYAG announced a settlement with Law360, a prominent legal news outlet, restricting Law360’s use of non-compete agreements with members of its editorial staff.  Before the settlement, Law360 required all of its editorial employees to sign agreements preventing them from working for a “direct competitor” for one year after leaving the company.  Under the settlement agreement, Law360 will no longer include non-compete provisions in its agreements with most editorial staff members, and it will alert former employees who left the publisher in the past year that their non-compete provisions will not be enforced.

Second, on June 22, 2016, the NYAG announced a settlement with Jimmy John’s Gourmet Sandwiches (“Jimmy John’s”).  Under the settlement, Jimmy John’s franchisees based in New York will cease requiring Jimmy John’s sandwich makers to sign non-compete provisions in connection with their employment and will void all such agreements currently in effect.  Jimmy John’s also will cease including sample non-compete agreements in the hiring packets that it sends to franchisees, and it will alert franchisees that the NYAG believes that such clauses are unlawful. 

The NYAG’s announcements come at a time when non-compete arrangements are under increasing scrutiny nationwide, following reports by both the U.S. Treasury Department and the White House regarding the purported anticompetitive nature of such provisions and the degree to which they “hurt worker welfare, job mobility, business dynamics, and economic growth more generally.”  Several states have introduced legislation to prohibit non-compete arrangements, and at least one other state attorney general has initiated litigation challenging the use of such provisions.

Takeaway

The NYAG’s newfound interest in non-compete provisions is a significant development.  Many investment managers require employees to assent to non-compete provisions as a condition of employment, and the prospect of a NYAG investigation into such practices—or, worse, litigation with the NYAG over such provisions—is disconcerting at best.  While the enforceability of restrictive covenants always has been subject to legal challenge, litigating against a former employee is an entirely different proposition than litigating against the State of New York.  Investment managers should monitor the NYAG’s actions in this area and take added care in drafting, negotiating and enforcing non-compete provisions.

At the same time, there are several reasons to doubt that the NYAG’s initiative will significantly impact the hedge fund or private equity industries:

First, the NYAG’s efforts to date have focused on non-compete agreements with lower-level employees, whom the NYAG claimed had “little to no knowledge of any trade secrets or confidential information.”  The investigations of Law360 and Jimmy John’s were led by the NYAG’s Labor Bureau, whose principal focus is the enforcement of laws protecting low-wage workers.  In each case, the NYAG abstained from challenging the use of non-compete provisions in contracts with certain senior personnel who were more likely to have access to confidential information and trade secrets.

At many hedge funds and private equity firms, the use of non-compete provisions is limited to more senior personnel who do have access to confidential information.  These provisions typically apply to members of an investment manager’s investment team—such as its portfolio manager(s), analysts, traders and investor relations personnel—and/or to senior members of the investment manager’s back-office team.

Second, the high burden of proof applicable to actions under the Executive Law hopefully will deter overreaching by the NYAG’s office.  To prevail in such an action, the NYAG has to prove not only that a particular non-compete provision is unenforceable as a matter of law, but that it is so far out of bounds as to be  “unconscionable.”  So long as an investment manager is reasonable, and has a good-faith basis for the inclusion of a non-compete provision, the NYAG should have a difficult time establishing a viable claim.

Last, it bears noting that, at least to date, the NYAG has challenged only non-compete provisions and has not sought to challenge other restrictive covenants, such as provisions prohibiting the solicitation of a company’s employees or investors.  Many investment managers rely largely on such non-solicitation provisions to protect their interests.  Absent an expansion of the NYAG’s current initiative, the use of such non-solicitation provisions will remain outside of the NYAG’s focus.

We are available to further discuss these matters, and the potential impact on your firm, at your convenience.

Share This Insight

Categories

Previous Entries

Deal Diary

June 27, 2024

On June 24, 2024, the U.S. Securities and Exchange Commission (SEC) published five new Form 8-K Compliance and Disclosure Interpretations (C&DIs) expanding the agency’s interpretations of cybersecurity incident disclosures pursuant to Item 1.05 of Form 8-K. In July 2023, the SEC adopted final rules with respect to cybersecurity incidents that generally require public companies to disclose (i) material cybersecurity incidents within four business days after determining the incident was material and (ii) material information regarding their cybersecurity risk management, strategy and governance on an annual basis. We wrote about the final cybersecurity disclosure rules here.

...

Read More

Deal Diary

February 12, 2024

The Securities and Exchange Commission (SEC) recently adopted final rules (available here; also see the fact sheet and press release) representing significant changes to  special purpose acquisition companies (SPACs), shell companies and the disclosure of projections. These rules aim to enhance disclosures, protect investors and align the regulatory framework for SPACs with traditional IPOs. The following summarizes the key aspects of these rules.

...

Read More

Deal Diary

October 4, 2023

On September 20, 2023, the U.S. Securities and Exchange Commission (SEC) issued a final rule amending the so-called “Names Rule” (found here) that is “designed to modernize and enhance” protections under Rule 35d-1 of the Investment Company Act of 1940. The final rule is part of the SEC’s holistic efforts to regulate environmental, social and governance (ESG) matters, and is the SEC’s latest attempt to curb greenwashing in U.S. capital markets. The amendments require registered investment funds that include ESG factors in their names to place 80% of their assets in investments corresponding to those factors, thereby extending to ESG funds the SEC’s long-standing approach of regulating the names of registered funds to ensure they are marketed to investors truthfully. Fund complexes with more than $1 billion in assets will have two years from the final rule’s effective date (60 days after publication in the Federal Register) to comply, while fund complexes with less than $1 billion in assets will be given a compliance period of 30 months.

Chair Gary Gensler said “[t]he Names Rule reflects a basic idea: A fund’s investment portfolio should match a fund’s advertised investment focus. In essence, if a fund’s name suggests an investment focus, the fund in turn needs to invest shareholders’ dollars in a manner consistent with that investment focus. Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired when selecting a fund based upon its name.” The sole dissenting vote against the rule modification, Commissioner Mark Uyeda, said “[w]ith these amendments, the Commission overemphasizes the importance of a fund’s name, as if to suggest that investors and their financial professionals need not look at the prospectus disclosures.” Commissioner Uyeda also expressed concern that fund investors will bear the increased compliance costs associated with the rule change.

...

Read More

Deal Diary

May 31, 2023

As discussed in our prior publication (found here), the Securities and Exchange Commission (SEC) adopted amendments on December 14, 2022, regarding Rule 10b5-1 insider trading plans and related disclosures. On May 25, 2023, the SEC issued three new compliance and disclosure interpretations (C&DIs) relating to the Rule 10b5-1 amendments.

...

Read More

Deal Diary

May 24, 2023

On May 15, 2023, the Eastern District of California ruled that California Assembly Bill No. 979 (“AB 979”) violates the Equal Protection Clause of the U.S. Constitution’s Fourteenth Amendment and 42 U.S.C. § 1981. As enacted, California’s Board Diversity Statute, required public companies with headquarters in the state to include a minimum number of directors from “underrepresented communities” or be subject to fines for violating the statute. AB 979 defines a “director from an underrepresented community” as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

...

Read More

Deal Diary

May 9, 2023

Update: On October 31, 2023, the Fifth Circuit granted the US Chamber of Commerce's petition for review of the SEC's share repurchase disclosure rules, holding that the SEC acted arbitrarily and capriciously in violation of the Administrative Procedure Act. The court directed the SEC to correct the defects within 30 days of the opinion. On December 1, 2023, the SEC informed the Fifth Circuit that it was unable to correct the rule's defects within 30 days of the opinion. On December 19, 2023, the Fifth Circuit vacated the SEC’s share repurchase disclosure rules.

...

Read More

Deal Diary

April 12, 2023

We have released our 2023 ESG Survey which includes a collection of reports reflecting on significant ESG themes and trends from 2022, as well as what we believe to be key developments for 2023.

...

Read More

Deal Diary

February 6, 2023

As companies begin preparing for the 2023 proxy season, we note that Institutional Shareholder Services Inc. (ISS) and Glass Lewis, the leading providers of corporate governance solutions and proxy advisory services, issued updated benchmark policies (proxy voting guidelines), which can be found here and here, respectively. The updated proxy voting guidelines generally focus on board accountability and oversight considerations and address topics such as climate accountability, board diversity, shareholder rights, corporate governance standards, executive compensation and social issues. What follows is a summary of the proxy voting guidelines published by ISS and Glass Lewis for the 2023 proxy season.

...

Read More

© 2024 Akin Gump Strauss Hauer & Feld LLP. All rights reserved. Attorney advertising. This document is distributed for informational use only; it does not constitute legal advice and should not be used as such. Prior results do not guarantee a similar outcome. Akin is the practicing name of Akin Gump LLP, a New York limited liability partnership authorized and regulated by the Solicitors Regulation Authority under number 267321. A list of the partners is available for inspection at Eighth Floor, Ten Bishops Square, London E1 6EG. For more information about Akin Gump LLP, Akin Gump Strauss Hauer & Feld LLP and other associated entities under which the Akin Gump network operates worldwide, please see our Legal Notices page.