Spokane Journal of Business

Bill limiting noncompete clauses likely will become law

Legislators approve bills to curb worker restraints

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The Washington Legislature has passed House Bill 1450 and companion Senate Bill 5478, which, if signed into law as anticipated, will limit the enforceability of noncompete agreements.

A noncompete agreement is a restraint on trade because it prevents a departing employee from working for a competitor or engaging in business that directly competes with the former employer for a period of time after changing jobs.

The general purpose of noncompete agreements is to prevent a former employee from working for a competitor for a defined period as a means to protect the former employer’s proprietary information or goodwill. However, if not narrowly tailored, some noncompete agreements can unfairly limit an employee’s ability to earn a living after leaving a job, creating inefficiencies in the free flow of labor.

Previously, Washington statutes only restricted noncompete agreements in the broadcasting industry and the practice of law. Washington courts have held noncompete agreements in other industries enforceable as long as they were “reasonable.” Courts determined reasonableness by looking at three factors: public policy, geographical scope, and duration of the noncompete restriction.

To determine if a noncompete agreement is reasonable, Washington courts consider:

•Whether the agreement is necessary to protect a legitimate business interest, the employer’s business or goodwill.

•Whether the agreement is any broader than reasonably necessary to protect the employer’s business or goodwill.

•Whether the noncompete restrictions overly limit the employee’s ability to earn a livelihood or provide necessary public services to a degree that contravenes public interest and violates public policy.

The new law would take effect Jan. 1. However, if an employer attempts to enforce a noncompete agreement after that date, it must comply with the bill’s requirements to remain enforceable. In that sense, the law would apply retroactively.

Under the bill, a noncompete agreement is defined as a written or oral agreement that restricts an employee or independent contractor from engaging in a lawful profession, trade, or business. The bill carves out an exception for nonsolicitation and confidentiality agreements; agreements related to trade secrets or inventions; and certain agreements entered into in connection with the sale of a business. The bill also will govern franchises.

Under the proposed law, a noncompete agreement will be void and unenforceable unless the employee subject to the noncompete is paid a salary of more than $100,000 a year, adjusted for inflation–$250,000 per year for an independent contractor. Additionally, the new law makes any noncompete agreement lasting longer than 18 months presumptively unreasonable unless the employer    can demonstrate that a longer duration is necessary to protect the business.

Other restrictions under the bill:

•An employer must disclose the noncompete terms in writing to a prospective employee.

•If a noncompete is entered into after an employee is already hired, the employer must provide independent consideration for the agreement, such as a raise or a promotion.

•If an employee is terminated as a result of a lay-off, the employer cannot enforce the noncompete unless the employer pays the employee compensation equal to the employee’s base salary through the period of enforcement, minus the compensation earned through subsequent employment.

This pending law also addresses restraints in the franchise context, prohibiting franchisors from restricting a franchisee from soliciting or hiring employees of the franchisor.

Lastly, the proposed law contains a moonlighting provision that will prohibit employers from restricting certain employees from working another job. This restriction is subject to certain exceptions, such as reasonable scheduling expectations of the employer, safety-related concerns, and potential conflicts of interest.

Although the proposed law seeks to remedy overbroad restraints on trade by limiting the use of noncompete agreements, certain restrictive covenants are necessary to prevent unfair competition. The goal is not to restrict competition, but to restrict unfair competition and thereby enhance robust, fair competition. The legislation recognizes this by exempting nonsolicitation and other agreements aimed to protect company goodwill, trade secrets, and inventions. A reasonable interpretation of the proposed bill also exempts nonservicing agreements, an offshoot of the nonsolicitation agreement.

Many businesses invest significant time or resources into creating or maintaining valuable goodwill through their customer relationships. For those businesses that have a legitimate interest in seeing these relationships aren’t eroded unfairly, they often enter into agreements that limit its employees from temporarily servicing their clients for a reasonable period of time after leaving their employ. This provides the former employer time to shore up its customer base. After this period expires, the free market is left to decide the outcome. While such a nonservicing agreement is a type of restrictive covenant, it doesn’t unfairly restrict an employee from engaging in a lawful profession, trade or business as proscribed by the new law, because it permits the employee to seek gainful employment with another. Presumably then, the new law also exempts nonservicing agreements, although they aren’t specifically enumerated as such in the body of the bill.

The Washington Supreme Court already has recognized the significance of nonservice agreements.

In the 1987 Perry v. Moran decision, the court held that nonsolicitation agreements sometimes don’t adequately safeguard the employer’s interest in retaining its clients because these agreements, unlike nonservicing agreements, typically require the employer to prove the former employee actively solicited the client and that solicitation caused the client to leave the employer. Proving this requires the employer to invest time and money into litigating these issues and likely will require the employer to bring those clients into the litigation as witnesses, damaging further the employer’s goodwill existing between those clients and the employer’s reputation with potential clients.

As HB1450/SB5478 appears to be becoming law, employers should keep in mind the issues addressed by the legislation.

William M. Symmes and Kimberly A. Kamel are partners at the Witherspoon Kelley and members of the Spokane law firm’s Labor & Employment Group. The group’s webpage is http://www.witherspoonkelley.com/labor-employment. Carrie Lofts, a Spokane legal intern, also contributed to this article.

 

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