Noncompete agreements have varying support
Case here demonstrates ongoing complexities of restrictive covenantsMarch 30th, 2023
At the start of the year, the Federal Trade Commission proposed a rule that would ban employers from imposing noncompete clauses, a practice it claims suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.
A recent lawsuit filed in the Spokane County Superior Court shows some of the complexities tied to noncompete clauses. As illustrated later in the story, there are different contracts beyond noncompete clauses between employers and employees, and different transactions and situations to be considered, such as how noncompete clauses function in mergers and acquisitions.
Kelly E. Konkright, principal with Spokane based-Lukins & Annis PS, says noncompete clauses are an important way for employers to protect their investments. Konkright is an attorney focused on various topics, including employment law, and is not related to the lawsuit later explained in this story.
He says it’s important to note that the proposed FTC ban on noncompete agreements doesn’t include banning non-solicitation, confidentiality, or nondisclosure provisions, which are distinct from noncompete clauses.
The proposed FTC rule specifically targets noncompete agreements that prohibit former employees from competing against former employers for a length of time and within a certain geographic area, but the proposed rule might not ban noncompete agreements within acquisition-and-merger scenarios, says Konkright.
“Banning noncompete contracts in a merger-and-acquisition context would be detrimental to economic interest and business in general,” he says. “When you’re buying a business, you’re often buying a client base and a client relationship. In the merger-and-acquisition process, noncompete (contracts) are essential in making purchasers willing to go through with the deal.”
Konkright adds that finding the right balance within a noncompete contract would be a better approach than simply eliminating it altogether.
Ronald Van Wert, principal with Etter, McMahon, Lamberson, Van Wert & Oreskovich PC, of Spokane, says that as a labor and employment attorney, he can see why some people would want to ban noncompete agreements, and others would like to retain them. Van Wert is also not associated with the case discussed in this story.
For employees, it is argued that noncompete contracts withhold an employee’s ability to work where they want, impact a person’s ability to advance in their career, and suppress wages, says Van Wert.
“The flip side is that the employer has put time and effort into training, educating, and advancing the careers of individuals … just for them to leave and ultimately compete against (the former employer),” says Van Wert.
In Spokane, Van Wert says he sees a lot of noncompete clauses within the health care industry. A large portion of his job is drafting restrictive-covenant contracts, which include noncompete clauses, to protect an organization. In addition, he works to free individuals from unreasonable restrictive covenants for them to move about freely, career-wise.
Van Wert says non-solicitation provisions have a two-fold purpose. Similar to noncompete, non-solicitation typically prohibits a former employee from soliciting clients they worked with while with an employer. The second part of non-solicitation prohibits a former employee from recruiting workers away from a former employer.
In non-disclosure, or confidentiality agreements, employees generally are asked to promise not to disclose proprietary information, such as trade secrets, says Van Wert.
In Washington state, proprietary information includes intellectual property, but can encompass other assets such as client lists, says Konkright.
“Generally, client lists can be a protected trade secret under Washington law if the employer has taken sufficient steps to protect (itself) from that information being disclosed,” he says.
Some types of noncompete agreements are out of favor lately among certain state and federal regulatory agencies.
The Washington state Attorney General’s office, for example, has been working for years to halt franchise companies from enforcing noncompete practices regarding their workers.
Konkright notes that in 2019, the Washington state Legislature amended the state’s noncompete laws so that they would apply only to professionals above a certain income threshold. According to the Washington state Department of Labor & Industries, the threshold currently is $116,500 for employees, and $291,400 for contract workers.
The lawsuit filed earlier this month demonstrates the way in which noncompete contracts are used within business transactions, as well as other covenants that are used to protect employers and their investments.
In the lawsuit, Stauffer & Associates PLLC, a Liberty Lake-based accounting firm that acquired Butler Robinson & Associates PS, of Spokane Valley, in August 2021, is suing the acquired firm’s former principals, two former employees, and Spokane-Valley based Anastasi, Moore & Martin PLLC.
The civil complaint alleges two or more former Butler Robinson employees “orchestrated a mass exodus of clients and personnel, depriving Stauffer & Associates of hundreds of thousands of dollars in annual revenues essentially overnight.”
As part of the acquisition, an asset agreement defined the assets that Stauffer & Associates purchased from Butler Robinson and its ownership to include all client lists, goodwill, and trade secrets, the lawsuit states.
The asset agreement also contained a “covenant not to compete,” which is intended to ensure that Stauffer & Associates would receive the expected value from the client base it was purchasing, the lawsuit claims.
The suit alleges a portion of its client base, which generates hundreds of thousands in annual revenue, was taken to the former employees’ new accounting firm, Spokane-based Anastasi, Moore & Martin.
Paul Anastasi, certified public accountant and managing partner of Anastasi, Moore & Martin, declines to comment on the case.
Sam Mansour, owner, partner, and certified public accountant at Stauffer & Associates, says the firm was blindsided by the exodus of employees taking client lists with them just a couple of months before the industry’s busiest season. In all, 13 employees left Stauffer & Associates over two weeks, nine of whom were immediately retained by Anastasi, Moore & Martin, the lawsuit states.
“There was no way to properly recover (and) very little time to adapt,” says Mansour.
The Stauffer & Associates lawsuit states the firm paid a $2.1 million premium on the condition that it was acquiring Butler Robinson’s client base, which generated about $2.1 million in annual revenue.
As reported by the Journal, the acquisition made Stauffer & Associates the largest Inland Northwest-based accounting practice in the Spokane area at the time. The acquisition brought the total number of employees under Stauffer & Associates to 54.
The lawsuit says the covenant not to compete prohibited the seller from providing tax and accounting services within a 25-mile radius, for a period of five years from the closing of escrow. The noncompete covenant further prohibited the seller from soliciting or providing tax or accounting services to “past and present clients of the practice,” also for a period of five years.
The lawsuit also claims that Stauffer & Associates executed employment contracts with Sherri Taylor and Terry Whitney, the two employees named in the complaint, with “strict non-solicit and nondisclosure provisions protecting the clients and trade secrets Stauffer & Associates had acquired from Butler Robinson.”
Taylor and Whitney couldn’t be immediately reached for comment.
Mansour says that within public accounting, similar to other industries, there is a trend of big firms taking over small firms as principals retire. Such was the case when Stauffer & Associates purchased Butler Robinson.
“It was portrayed as a once-in-a-lifetime scenario,” he says of the acquisition. “I don’t think we’ll ever do it again.”
A conference on the lawsuit is scheduled for June 23 in Spokane County Superior Court, before Judge Toney Hazel.