Federal Court Orders Shed Light on Application of New Noncompete Law

Todd Williams | April 30, 2021

Since Washington’s new restrictive covenant law came into effect on January 1, 2020, a few rulings from Washington’s federal district courts provide early indications of how courts will apply the law.  All of these rulings were rendered in the context of motions for preliminary injunctions.

In Robins v. NuVasive, Inc.,[1] the Court addressed certain of the statutory enforceability requirements in the new law.  NuVasive sought to enjoin two former employees from working for a competitor in the spinal hardware industry.  Both former employees entered into noncompete agreements when they were hired in 2018 and when their annual earnings were less than $100,000.  The noncompete agreements were silent as to the fact that the agreements may later become enforceable if their salaries exceeded $100,000.  NuVasive argued that when the employees left the company, their salaries were over $100,000.

The Court first addressed the issue of whether the noncompetition covenants met the disclosure requirements under RCW 49.62.020.  This statute requires the employer to “specifically disclose[] that the agreement may be enforceable against the employee in the future” “if the agreement becomes enforceable only at a later date due to changes in the employee’s compensation.”  RCW 49.62.020(1)(a)(i). The NuVasive Court found the covenants to be unenforceable because, even though the agreements were executed prior to the new law, the noncompetition covenants “failed to ‘specifically disclose that the agreement may be enforceable against the employee in the future,’ as required.”[2]

The Court next addressed whether, even if the required disclosures had been made, the employees would have met the $100,000 salary threshold under RCW 49.62.020.  NuVasive argued that earnings should be calculated based on prorating and annualizing earnings from the date of separation for the remainder of the year.  The Court rejected this argument and clarified that the analysis of earnings is retrospective, not prospective.  The relevant number is what is disclosed in box one of the W-2 form for the calendar year prior to the employee’s departure.[3]  If in the previous year the employee worked only for a portion thereof, then the earnings are annualized.  Because neither of the former NuVasive employees had earnings in excess of $100,000 during the year prior to their separation, the Court found the noncompetition covenants were unenforceable on this basis as well.

Finally, the court assessed whether provisions of the non-solicitation restrictions were unenforceable.  The Court found that the portion of the non-solicitation obligations that prohibited the employees from “representing, promoting, or otherwise trying to sell in the territory they served any lines or products that…compete with NuVasive Products” effectively operated as a noncompetition covenant because it was not limited to former NuVasive customers.  Accordingly, this provision was unenforceable for the same reasons as the other noncompetition covenants.

The NuVasive Court went on to find that the enforceable non-solicitation covenants were reasonable, but denied the motion for preliminary injunction because NuVasive had not made a “clear showing” that these covenants were violated.

In Prime Group, Inc. v. Dixon,[4] the Court addressed the burden required to overcome the statutory presumption in RCW 49.62.020 against restrictions longer than eighteen months.  In assessing plaintiff’s attempt to enforce a three year noncompete, the court noted that even though defendant was a shareholder who had access to strategic plans, Prime failed to explain why 18 months was unreasonable.  Further, Prime failed to identify any trade secrets that could justify such an extended restriction.[5]  While noting that it had the authority to reform a noncompete covenant “to a more limited—and reasonable—scope”, the court found it was unnecessary in this instance as a result of the restrictions placed upon the defendant by his new employer.[6]  Although dicta, the Court’s order in Prime suggests that restrictions longer than eighteen months are subject to reformation and will not be found per se unenforceable.

Finally, in CVS Pharmacy Inc. v. Brown,[7] the Court, in conducting a choice of law analysis, found that the new noncompete law rendered plaintiff’s noncompete agreement unenforceable because it required the defendant to adjudicate a noncompetition covenant outside of Washington in violation of RCW 49.62.050.[8]

Although there have yet to be any appellate opinions addressing the new noncompete law, these three rulings together suggest what many have suspected: that the new restrictions on noncompetition covenants have ushered in a more unforgiving environment for employers seeking to enforce restrictive covenants.  Employers are advised to review existing noncompetition and nonsolicitation agreements, particularly in light of the retroactive application of the new law.

About the author:  Todd Williams is a partner with the firm. His diverse litigation, trial, and counseling experience includes many disputes involving noncompetition covenants and employee mobility.


 

[1] 2:20-CV-292-RMP, 2020 WL 7081588 (E.D. Wash. Dec. 3, 2020).

[2] Id. at *5.

[3] Id. at *5-6.

[4] 2:21-CV-00016-RAJ, 2021 WL 1664007 (W.D. Wash. Apr. 28, 2021).

[5] Id. at *4.

[6] Id. at *5.

[7] C21-306 MJP, 2021 WL 977697, at *4 (W.D. Wash. Mar. 16, 2021).

[8] Id. at *4.

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