Non-Compete Agreements

Non-Compete Agreements

Several years ago, this author previously wrote a piece for the Journal of Business on non-compete agreements. Much has changed since that article and it’s time for employers to reconsider their employment agreements that include non-compete clauses because the enforceability of such covenants has been significantly curtailed.

In the olden days (prior to 2019), the analysis of the enforceability of a non-compete agreement rested on an analysis of whether the non-compete provisions were reasonable and whether the agreement otherwise complied with standard contractual enforcement provisions (the so-called offer, acceptance, and consideration). As a reminder, “consideration” usually is in the form of either money paid to the employee or the fact that the initial employment itself was contingent upon the employee accepting the terms of the employment agreement which included the non-compete clause.

In 2019, after finding that “workforce mobility is important to economic growth and development” the legislature enacted prohibitions on the enforceability of non-competition agreements. See RCW 49.62.005 et seq. A non-competition covenant is broad and “includes every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.” RCW 49.62.010.

Today in Washington state, non-compete covenants are not enforceable unless: (1) the employee makes over $100k a year; and (2) the terms of the non-compete are in writing and disclosed prior to employee’s acceptance of employment OR the employer provided independent compensation if entered into during the term of employment. RCW 49.62.020.  Additionally, the employer must agree to compensate the employee his or her base salary if the employee is laid off for the term of the non-compete (with adjustment based on employee’s subsequent employment compensation). Id.

The statute also applies to existing contracts. It specifically included retroactive application to “all proceeding commenced on or after January 1, 2020, regardless of when [a breach of the non-compete covenant] occurred.” RCW 49.62.100. So, if an ex-employee is currently sitting out the competitive employment awaiting expiration of a non-compete, it might be time to consult with an attorney about getting back to work.

Importantly, most non-compete agreements are now limited in time to just 18 months post-employment. Specifically, under the new law, a non-competition covenant with a duration longer than 18 months is presumptively unreasonable and unenforceable, though the employer can rebut the presumption. Only one reported court case has evaluated the reasonableness of non-compete time limits after the passage of the 2019 law. In that case the non-compete agreement was for 3 years and the court found that the employer failed to show that the term was reasonable even though the employer asserted that the employee was a former shareholder of the employer which granted him access to trade secrets and strategic plans. Prime Group, Inc. v. Donald Dixon (W.D. Wash. 2021). To exceed 18 months, the law requires that the employer prove “by clear and convincing evidence that a duration longer than eighteen months is necessary to protect the party’s business or goodwill.” RCW 49.62.020. That proof standard of “clear and convincing” evidence is an elevated burden of proof. This means both that the burden of proof is on the employer (and not the employee) and that the employer has a heightened level of proof.

As a final note, the new law has not entirely replaced the reasonable analysis that was the hallmark of pre-2019 non-compete enforcement analysis, instead, it created another level of scrutiny. Therefore, the non-compete agreement need not only comply with the 2019 law, but must also still meet the reasonableness tests from Perry v. Moran, 748 P.2d 224 (Wash. 1987) that courts look to in order to determine enforceability: “(1) whether restraint is necessary for the protection of the business or goodwill of the employer, (2) whether it imposes upon the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill, and (3) whether the degree of injury to the public is such loss of the service and skill of the employee as to warrant nonenforcement of the covenant.”

Taken together, the enforcement of a non-compete agreement looks to require an excellent set of facts and a skilled attorney to draft the agreement.

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The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.

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