New Law Limits Enforceability of Noncompete Agreements

After several years of failed attempts, the state of Washington passed a law in May 2019 that will significantly limit the enforceability of noncompetition agreements under Washington law. Key aspects of the act, which takes effect on January 1, 2020, include the following:

1. Income Threshold
   The income threshold is likely to be the most widely reported facet of the act. Employers may not enter into or enforce a “noncompetition covenant” unless the restricted employee’s yearly earnings exceed $100,000. The $100,000 figure will be adjusted annually for inflation by the Washington State Department of Labor and Industries based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the individual is an independent contractor, the income threshold is $250,000, which will also be adjusted for inflation.
   Employers will have to track whether restricted-employee compensation keeps pace with inflation, or the noncompetition covenants will become unenforceable. Compensation is the amount that appears in box 1 of an employee’s IRS form W-2 or payments reported on an independent contractor’s 1099.
2. Definition of “Noncompetition Covenant”
   The definition of “noncompetition covenant” is notable not for what it includes (any agreement that prohibits or restrains an individual from engaging in a lawful profession, trade or business), but for what it expressly excludes. Notably, the new limits do not apply to the following:
   1. Nonsolicitation agreements, which extend to solicitations of (a) former coworkers to cease employment and (b) employer's customers to cease or reduce business with the employer
   2. Confidentiality agreements
   3. Agreements prohibiting use or disclosure of trade secrets or inventions
   4. Agreements entered into relating to the sale of a business or franchise
3. 18-Month Presumption
   According to the new law, noncompetition covenants exceeding 18 months are presumed to be “unreasonable and unenforceable.” Employers may rebut this presumption, but it requires a high burden: “clear and convincing evidence” that a longer duration “is necessary to protect the party’s business or goodwill.”
4. Layoffs Affecting Enforceability
   Noncompetition covenants are unenforceable if the employee is discharged as a result of a layoff, unless the agreement requires that the employer pay the employee’s base salary during the period of enforcement. The employer may offset these payments if the employee obtains noncompetitive employment, although it is not clear if the employee is required to do so. The law does not define “layoff."
5. Compensation Changes
   If an employer hires an individual at less than the $100,000 income threshold, it may require that employee to enter into a noncompetition covenant that becomes enforceable if and when his or her compensation exceeds the threshold. If an employer wishes to do so, it must disclose the terms and conditions of the agreement prior to the acceptance of the offer of employment and disclose that the agreement may be enforceable in the future.
   The act also incorporates the general rule that a noncompetition covenant may be entered into during employment if it is supported by independent consideration.
6. Still Subject to Existing Law
   Even if a noncompetition covenant otherwise complies with the act (an employee’s compensation exceeds the threshold and the duration is less than 18 months), the noncompetition covenant must still comply with existing common law standards (i.e., it must be reasonable in duration, scope and geographic area).
7. Forum Selection and Choice of Law
   Agreements for Washington-based employees may not select a forum outside Washington or choose a different state’s law that deprives Washington-based employees of the benefits of Washington law.
   Because the act speaks about depriving the “benefits” of Washington law, it is unclear if the agreement could apply the law of a state that goes further than Washington, such as California. Whether an employee is Washington-based is often unclear, and Washington courts apply complicated choice-of-law principles in making that determination.
8. Outside Employment
   Distinct from the noncompete portions of the act, employers may not restrict supplemental or outside employment of current employees who make less than twice the applicable state minimum wage. This provision does not apply if the employer can show the outside employment raises safety issues or interferes with reasonable and normal scheduling expectations of the employer, and it does not alter the existing common law duty of loyalty to the employer.
9. Enforcement
   Employers may want to pay particular attention to the enforcement scheme in the new act, which has wide-ranging consequences for both existing and future noncompetition covenants. This is because the act applies retroactively, “regardless of when the cause of action arose.” But the act is careful to treat existing (pre-2020) agreements differently than new (post-2020) agreements.
    
   1. Enforcing Pre-2020 Agreements
      If, after January 1, 2020, a company has a pre-2020 noncompetition covenant but does not attempt to enforce that covenant, the employee does not have a private right of action/counterclaim. If, after January 1, 2020, a company attempts to enforce a pre-2020 noncompetition covenant that may violate the act, the court may modify the agreement to make it enforceable. If the agreement is modified or if the employee brings a counterclaim, the company may be required to pay the greater of actual damages or $5,000 plus attorneys’ fees, expenses and costs.
      In other words, an employer only subjects itself to exposure for violating the act if it seeks to enforce its pre-2020 agreements. Given this potential exposure (or consequences), employers may want to consider entering into new agreements with their employees.
   2. Post-2020 Agreements (Whether Enforced or Not) 
      For a noncompetition covenant entered into after the effective date of the act, an employee may bring a counterclaim if the employer is seeking to enforce a noncompetition covenant that violates the act. Further, it appears that an employee may bring a stand-alone claim regarding a new agreement if the agreement’s terms alone violate the act, even if the employer is not actively seeking to enforce the agreement. And if the post-2020 agreement is modified in any way (or only partially enforced), then the employee may pursue the greater of actual damages or $5,000 plus attorneys’ fees, expenses and costs. As such, employers may want to ensure that their new agreements strictly comply with Washington common law and the act.

Given these changes, employers may want to review their existing noncompetition covenants to ensure compliance with Washington law and the act, and consider a strategy to bring their agreements into compliance.

This article was drafted by an attorney at Ogletree Deakins, and is reprinted with permission. This information should not be relied upon as legal advice.

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