Noncompete agreements may not be binding, thanks to 2019 Legislature
Several years ago, I wrote about noncompete agreements for the Tri-cities Area Journal of Business.
Legislation passed in 2019 has changed the rules, and it is time for employers to reconsider agreements that include noncompete clauses because the enforceability has been significantly curtailed by the new Washington law.
In the olden days (prior to 2019), the enforceability of a noncompete agreement rested on an analysis of whether its 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 noncompete clause.
In 2019, after finding that “workforce mobility is important to economic growth and development,” the state Legislature limited the scope of noncompete agreements. (See RCW 49.62.005 et seq.)
A noncompetition 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, noncompete covenants are not enforceable unless: the employee makes over $100,000 a year; and the terms of the noncompete 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 noncompete (with adjustment based on employee’s subsequent employment compensation).
The statute also applies to existing contracts.
It specifically included retroactive application to “all proceeding commenced on or after Jan. 1, 2020, regardless of when (a breach of the noncompete covenant) occurred.” RCW 49.62.100. So, if an ex-employee is currently sitting out the competitive employment awaiting expiration of a noncompete, it might be time to consult with an attorney about getting back to work.
Importantly, most noncompete agreements are now limited to 18 months post-employment.
Specifically, under the new law, a noncompetition 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 noncompete time limits after the passage of the 2019 law.
In that case the noncompete agreement was for three 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 18 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 noncompete enforcement analysis. Instead, it created another level of scrutiny.
Therefore, the noncompete agreement need not only comply with the 2019 law, but also must 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 noncompete agreement looks to require an excellent set of facts and a skilled attorney to draft the agreement.
Beau Ruff, a licensed attorney, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.