Noncompetes: The Landscape has Changed

Lawrence R. Cock, Jack M. Lovejoy, and Benjamin Byers | May 29, 2019

Washington Governor Jay Inslee recently signed Engrossed Substitute House Bill 1450, which substantially reforms Washington State’s common law of noncompetition covenants. As a result, employers who use noncompetition covenants with Washington-based employees will need to scrutinize their agreements and make changes before the effective date, January 1, 2020.

The bill was sponsored by Senator Marko Liias (D-Lynnwood) and Representative Derek Stanford (D-Bothell). The legislators were troubled by the ubiquity, expanding scope of prohibited activities, and lengthening duration of noncompetition covenants. The new law effectuates seven major reforms:

• Wage thresholds. If an employee earns less than $100,000 annually, yet has signed a noncompetition covenant, the covenant is void and unenforceable. If an independent contractor earns less than $250,000 annually, yet has signed a noncompetition covenant, the covenant is void and unenforceable.
• Notice provisions. A noncompetition covenant is void and unenforceable if the employer fails to tell the employee about “the terms of the covenant” before the employee accepts the job.
• Limit on duration. Regardless of an individual’s earnings, noncompetition covenants longer than eighteen months are presumed unreasonable. An employer can rebut the presumption with clear and convincing evidence.
• Protection for workers that are laid off. A noncompetition covenant cannot be enforced against employees terminated “as the result of a layoff,” unless the employer continues to pay the employee’s base salary (less compensation the employee earns from a new employer).
• Penalty and attorney fees for overly broad covenants. If a court concludes that a covenant violates the statute, or if a court or arbitrator, applying the rule of reasonableness, revises, rewrites, or only partially enforces a noncompetition covenant, the ex-employee receives a $5,000 statutory penalty plus his or her attorney fees, expenses, and costs.
• Restrictions on choice of law/choice of venue. A choice of law clause applying another state’s law or a choice of venue clause requiring an employee or independent contractor to litigate a noncompetition covenant in another jurisdiction is void and unenforceable if the employee or independent contractor is “Washington-based.”
• Second jobs/workers for franchises. The ability of low wage workers to hold a second job is better protected and fast food and other franchise workers are protected from prohibitions on being hired by other franchisees.

To give these reforms utmost effect, the legislature included four other provisions.

First, the legislature made the statute applicable “to all proceedings commenced on or after” January 1, 2020, “regardless of when the cause of action arose. To this extent, this chapter applies retroactively, but in all other respects it applies prospectively.” § 11.

Second, the legislature exercised the state’s police power and instructed the courts to construe the statute “liberally for the accomplishment of its purposes.” § 12. To ensure the courts understood the legislature’s purposes, the legislature included findings: “The legislature finds that workforce mobility is important to economic growth and development. Further, the legislature finds that agreements limiting competition or hiring may be contracts of adhesion that may be unreasonable.” § 1.

Third, the legislature included a broad displacement provision patterned on the Uniform Trade Secrets Act. § 10(1). Yet the legislature expressly allowed further “development of the common law.” § 10(2). Courts are free to re-evaluate restrictive covenant law to the extent it is not covered by the legislation. Looked at another way, the legislature identified practices that are no longer permitted. But it did not say that other practices are permitted; rather, the legislature has left it to the judiciary to decide what remaining common law principles should also be reformed.

Fourth, for statutory violations, the legislature invited the attorney general and individual employees to take the offensive. The attorney general, or “a person aggrieved by a noncompetition covenant to which the person is a party” can initiate an action to seek the higher of actual damages or the $5,000 statutory penalty plus attorneys’ fees, expenses, and costs.

In conclusion, the legislature recognized that restrictive covenants may be contracts of adhesion and that worker mobility is beneficial. Employers with Washington-based employees have until January 1, 2020 to comply with the law by using noncompetition covenants only with highly compensated employees, and drafting shorter, narrower covenants for them.

If you have any question re this topic, please contact Lawrence Cock by email at  lrc@corrcronin.com or by phone: (206) 812-0836.