‘Protectable interests’

Proposed Washington state law tightens up noncompete agreements

Person writing with pen

A new law proposed in Washington state could tighten employment restrictions on businesses that employ sales forces, innovators, physicians and more. The new law narrowing the restraints of noncompetition covenants is expected to pass and would take effect on Jan. 1, 2020.

Noncompetition agreements (or noncompetes) are a standard business practice, but in Washington state, they are largely governed by common law, and the new legislation would codify into law restrictions that could negatively impact businesses. At the very least, it will complicate agreements already in existence.

Joseph Vance, a Vancouver employment litigation attorney and partner at Miller Nash Graham and Dunn, cautioned businesses to start reviewing current employment agreements with their attorneys.

“Many employers in Southwest Washington currently have what they believe are enforceable noncompetes that will no longer be enforceable,” Vance said. “They need to go back and review what agreements they currently have.”

While Washington doesn’t favor restraints on trade, noncompetes are commonplace in various industries, and generally are meant to keep employees from taking trade secrets, compromising “protectable interests” or working in a specific geographical region for a specific period of time after the employee has left the company. Current statutory law addresses noncompetition agreements only in the broadcasting industry.

Currently, Washington courts will enforce a noncompetition agreement if the agreement is reasonable.

Reasonableness involves consideration of three factors, which are whether the:

  • restraint is necessary for the protection of the business or goodwill of the employer;
  • restraint imposes on the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill;
  • and whether, and to what degree, the public is injured by a loss of the service and skill of the employee in the marketplace.

Reasonableness of an agreement is generally determined by the time and geographic scope of the restraint. In general, if a noncompete is agreed to after an employee is hired, the agreement is enforceable only if the employer provides the employee a raise or a promotion.

The new legislation includes salary thresholds for employees and independent contractors, specific time limits, guidelines for franchisors and more. Major provisions include the following:

The law would make noncompetes unenforceable unless an employee earns more than $100,000. If an employee with a noncompete is laid off, he must be compensated through the life of the agreement.

It creates a presumption that a noncompete longer than 18 months is unreasonable and unenforceable.
An agreement with an independent contractor is unenforceable unless the contractor’s earnings exceed $250,000 per year.

An agreement between a performer and a performance space cannot exceed three days.

A franchisor may not restrict, restrain or prohibit a franchisee from soliciting or hiring an employee of a franchisee of the same franchisor or any employee of the franchisor.

There is also a minimum earnings threshold and a provision that allows moonlighting. Under the new law, in most circumstances, employers can’t restrict an employee earning less than twice the state minimum wage from having an additional job, supplementing their income by working for another employer, working as an independent contractor or being self-employed.

Most of these provisions are based on current court decisions, but will now have the enforcement power of statute behind them. And the penalty for a faulty noncompetition covenant is steep. If a court determines that the agreement is in violation of the law, the company or party who is enforcing it must pay the greater of the actual damages or $5,000 to the employee, plus reasonable attorneys’ fees, expenses and costs. Some see this as excessively punitive toward businesses.

“Subsection 9 is the section of the bill (employers) are really concerned about – it’s a brand new cause of action, a brand new way to sue people,” said Catharine Morisset, partner at Fisher Phillips, a national Labor and Employment law firm with offices in Washington and Oregon. “Under this new law, an employee can sue and they could get damages. That’s too much, it’s really punitive.”

And because of the new earnings thresholds, Vance said company owners will need to frequently review noncompetes as their employees’ compensation changes, but also because the thresholds are subject to inflation increases.

The new law is only concerned with noncompetes, but Vance stressed that companies should also use nonsolicitation and confidentiality agreements when applicable.

“Even if you no longer use a noncompete, you can use the other tools at your disposal to give you that kind of protection,” he said.

Opponents of the bill say the earnings threshold is problematic and that noncompete agreements often apply to lower wage-earners. Statewide, the hospital industry argued that physicians are a significant investment, and one that needs to be protected.

The Washington State Hospital Association (WSHA), which represents eight hospitals in Southwest Washington, fought to lower the compensation threshold from $185,000 to $100,000 and succeeded, reflected in the amended bill moving through the senate. WSHA Assistant Director of Communications Tim Pfarr said the association said the amended proposal “takes a more balanced approach” than was initially proposed.

“Noncompete agreements are important tools that protect the substantial resources hospitals, health systems and physicians groups in Washington state use to invest in bringing providers to communities and developing advances in care,” Pfarr said. “Investments can easily reach hundreds of thousands of dollars and include everything from income guarantees to equipment purchases and leasing office space. We support preserving the right to protect these investments, and the $100,000 salary threshold ensures that that protection can continue.”

The association is also concerned with the issue of “moonlighting,” and preserving the right to bar “an employee’s outside work, namely for patient and workplace safety.

Supporters claim that current agreements are overly broad and widespread, affecting too many employees, independent contractors, musicians and others who don’t threaten intellectual property. Some say innovation is hampered by broad noncompetition covenants, and that courts have applied contract law, which is biased toward enforcement.

Vance said in the past, employers may have used noncompetes too broadly across their organizations.

“You have to have a protectable interest,” he said. “From a business standpoint, employers need to be a little more circumspect, a little more intentional about where you are really at risk.”