Will banning certain non-compete agreements protect employees and foster competition? Washington state legislators and Governor Inslee think so.
Non-compete agreements raise policy issues regarding the balancing of legitimate business interests with a worker’s right to freely seek employment—a right that some argue is increasingly important in the growing gig economy. Like many states, Washington courts have stricken that balance by enforcing non-compete agreements that are “reasonable.”[1] Courts determine whether an agreement is “reasonable” by considering:
(1) whether the restraint is necessary to protect the employer’s business or goodwill, (2) whether it imposes on the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill, and (3) whether enforcing the covenant would injure the public through loss of the employee’s service and skill to the extent that the court should not enforce the covenant, i.e. whether it violates public policy.[2]
The geographic scope and time period are key in determining whether the non-compete adversely affects an employee’s ability to earn a living.[3] Further, under current Washington law, non-compete agreements that have unreasonable terms are not necessarily unenforceable. Instead, courts will enforce non-compete agreements to the extent reasonably possible to accomplish the contract’s purpose (sometimes called “blue penciling”).[4]
Washington law in this regard is essentially in accord with the law of many other states, which likewise enforce “reasonable” non-competition agreements under their own standards of reasonableness. A few states, such as California, have taken a different approach: in California, non-compete agreements are generally not enforceable unless a narrow exception applies.
But Washington law is about to change—at least for some employees.
On May 8, 2019, Governor Inslee signed into law new legislation in Washington that seeks to promote workplace mobility by prohibiting certain non-compete agreements.
Under the new statute, non-compete agreements will be enforceable only as to employees who make more than $100,000 per year or independent contractors who make more than $250,000 per year. The law also creates a presumption that non-compete agreements exceeding 18 months after the employee’s termination are unreasonable and unenforceable, placing the burden on employers to show that a longer duration is necessary to protect the business or its goodwill. The law contains additional protections for low-income workers and effectively prohibits forum-selection clauses (e.g., requiring former employees to defend a legal action in the former employer’s home state).
The new law would not, however, impact the enforceability of non-solicitation or confidentiality agreements. And, like California’s statute, there is an exception for non-competes executed in connection with the sale of a business.
Finally, this new law applies to all proceedings that are commenced on or after January 1, 2020 (the effective date) – regardless of when the cause of action arose. This means that the new law applies to noncompete agreements that were (or are) entered into before January 1, 2020, as long as the legal action about that agreement is initiated on or after January 1, 2020. However, if the noncompete agreement was signed before January 1, 2020, and it is not being enforced, it cannot be sued upon under the new law.
Whether making these changes to Washington law will foster innovation and spur further economic growth in the State or will drive companies elsewhere will be the topic of much debate. California’s longstanding and more strict restrictions on enforcement of non-competes do not seem to have kept business away from that state. For now, it is important for businesses and employees to be attuned to how their rights may change and plan accordingly.
You can see the whole of the new statute here: http://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bills/House%20Passed%20Legislature/1450-S.PL.pdf
[1] Emerick v. Cardiac Study Ctr., Inc., P.S., 189 Wn. App. 711, 720–21 (2015).
[2] Id. at 721–22.
[3] Id. at 724.
[4] Id.
Brandi B. Balanda
Brandi has wide-ranging experience successfully litigating large, complex cases, from defending a senior executive against the largest trade secret claim asserted in Washington to prosecuting fraud, contract, and fiduciary duty claims related to the financing of major real estate development projects.