NEW YORK: An Introduction

New York v California – A Study of Contrast Between the Coastal States and How New York Better Protects Businesses

On 30 June 2023, the New York State legislature passed a bill to ban new non-compete clauses in employment contracts. New York State Governor Kathy Hochul, however, vetoed the bill on 22 December 2023, reinforcing a key difference between New York and California law. The two states’ approaches to non-compete agreements is, in fact, just one key difference between these coastal litigation hotbeds. Other differences include their laws governing retaining liens for attorneys, and unfair competition.

Whether you are a business owner or a lawyer, the jurisdiction you are in will have a significant impact on your case. Sometimes the forum of litigation is thrust upon you, but other times it is carefully decided based on where business is conducted and what forum selection provisions are used in contracts. This overview compares the differences in New York and California law on these key issues. Between the two jurisdictions, New York offers greater flexibility, with more predictable regulatory oversight.

Non-compete Clauses 

Non-compete clauses are provisions in contracts that prohibit employees from working for a competitor or opening a competing business for a period of time after leaving their job. In New York, non-competes are legal, provided they are “reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee”: JLM Couture, Inc. v Gutman, 91 F.4th 91, 106 (2d Cir. 2024).

On 30 June 2023, the New York State legislature passed a bill to amend the labour code to prohibit “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement”. A “covered individual” was defined broadly to include virtually any employee. While broadly applicable to any new non-compete agreement, the bill made clear that it would not apply retroactively, and also would not ban agreements for a fixed term of employment. Governor Hochul vetoed the bill on 22 December 2023, taking issue with the legislation’s “one-size-fits-all” approach. The Governor did note that she would be open to legislation restricting non-competes for middle-class and low-wage workers.

California, by contrast, broadly prohibits the use of non-competes in employment contracts. California’s non-compete prohibition – which has been in effect for decades – states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”: Cal. Bus. & Prof. Code § 16600. Recently, California further expanded its already broad prohibition. In the Fall of 2023, California Governor, Gavin Newsom, signed into law two new pieces of legislation – Senate Bill 699 and Assembly Bill 107 – which, together, establish that non-compete provisions are unenforceable in California regardless of whether the contract was signed outside California, and also make it a civil violation for an employer to include a non-compete provision in an employment contract.

Business owners may find non-competes desirable in employment contracts because they decrease the risk that a former employee will use trade secrets or other confidential business information for the benefit a competitor. Non-competes can also decrease a business owner’s risk that, after providing costly training to an employee, the employee will leave for a competitor and use those skills elsewhere. Absent further changes in the law, New York provides business owners the flexibility to use non-competes in employment contracts.

Retaining Liens 

Another difference between New York and California is the protection afforded to lawyers and clients in the event that the attorney–client relationship sours. New York allows attorneys to retain work product and client documents as security for their fees. The law imposes a “retaining lien” on the attorneys’ work product, which “entitles the attorney to retain all papers, securities or money belonging to the client that come into the attorney’s possession in the course of the representation, as security for payment of attorneys’ fees”: Hoke v Ortiz, 83 N.Y.2d 323, 331 (1994) (internal quotations omitted). There are, of course, limitations – the withdrawing attorney must take reasonable steps to avoid foreseeable prejudice to the rights of the client, and, like other liens, the client can post a bond to lift it. See, eg, In re Makames, 238 A.D. 534, 537 (4th Dep’t 1933).

Retaining liens provide powerful protection to attorneys in New York. This protection for lawyers is balanced by a countervailing protection to clients – a three-year statute of limitations for malpractice claims.

California takes the opposite approach. In California, clients have a one-year statute of limitations time period in which to bring malpractice claims, but retaining liens on client files are not allowed: Academy of California Optometrists, Inc. v. Superior Court, 51 Cal. App. 3d 999, 1006 (Ct. App. 1975). Indeed, California’s prohibition on retaining liens is codified by California Rule of Professional Conduct 1.16(e), which provides that upon termination, “the lawyer promptly shall release to the client, at the request of the client, all client materials and property… whether the client has paid for them or not”.

Unfair Competition Law 

New York and California also have vastly different authority governing unfair competition between businesses. In New York, unfair competition is a common law claim which has historically been limited to instances of misappropriation, with the primary concern being “the protection of a business from another’s misappropriation of the business’ organization or its expenditure of labor, skill, and money”: Bytemark, Inc. v Xerox Corp., 342 F. Supp. 3d 496, 505 (S.D.N.Y. 2018) (internal quotations omitted). It “does not have boundless application as a remedy for unfair trade practices”: Bytemark. (This is separate and apart from the Donnelly Act, New York’s antitrust law which governs anti-competitive conduct and overlaps with the Federal Sherman Act.)

California, by contrast, has a statutory scheme which broadly prohibits “any unlawful, unfair or fraudulent business act or practice”: Cal. Bus. & Prof. Code § 17200. The statute provides a private right of action and also allows for regulatory enforcement. California’s Unfair Competition Law (UCL) has been interpreted broadly, allowing virtually any violation of law to simultaneously be a violation of the UCL, as well any business practice which is considered “unfair” under the statute. However, one restriction of the UCL is that only injunctive relief and restitution are available: Chowning v Kohl’s Department Stores, Inc., 2018 WL 3016908, at *1–2 (9th Cir. 2018).

Even with this limitation, the breadth of potential liability under California’s UCL can be risky for businesses. This is especially true for start-ups and other new market entrants that have to navigate unfamiliar regulatory regimes. The UCL can make an independent violation of a regulation into a violation of the UCL, turning a foot-fault into a claim that a competitor might be able to sue under.

In Conclusion 

Ultimately, whichever jurisdiction your case lands in will have advantages and disadvantages based on your position as plaintiff or defendant. However, New York law generally provides business owners and attorneys greater protections, operational flexibility and regulatory certainty.