When a company hires senior employees, it may invest a great deal of time and money training them. Employees also may receive access to confidential client lists, relationships with customers and vendors, or proprietary business information. So what happens when employees move on, taking that training and knowledge with them? Ex-employees sometimes are uniquely positioned to open up a competing business; as a practical matter, a company is often training its future competition. The potential damage could be even greater when an employee leaves with confidential client information.
Many employers attempt to mitigate or avoid such threats to their business by entering into non-compete agreements with their new hires.
A non-compete agreement often limits an employee’s ability to work for a competitor, or to compete directly with a former employer, in a specific geographic location and for a set amount of time after leaving the company. These agreements also can prevent a former employee from using confidential information he or she obtained about an employer’s business through the employment—an obligation that the ex-employee generally has regardless of whether he or she signs a non-compete.
A recent post to this blog discussed new legislation in Washington that would, among other things, bar the enforcement of non-compete agreements against employees who make less than $100,000 per year or contractors making less than $250,000 per year. That still leaves a lot of employees with whom non-competes will still be enforceable—but the requirement will remain that the scope of the non-compete must be reasonable under tests developed by the courts.
Generally, Washington courts will enforce non-compete agreements provided they are deemed reasonable under applicable Washington law. As tantalizing as it may be to some employers, it would be unreasonable to prevent employees from working anywhere in the country in their fields until the end of time. For a non-compete to be enforceable, Washington courts ask three questions:
1. Is the non-compete necessary to protect the business or the employer?
A sandwich shop probably does not need to have its cashiers sign a non-compete to protect its business. But the manufacturer of highly specialized medical equipment whose salespeople have access to a curated customer list and non-public information about the customers may need a non-compete to ensure that proprietary information known to the salespeople is not misused after they depart.
2. Are the limits of the agreement greater than necessary to protect the business or employer?
For a non-compete agreement to be enforceable, its restrictions must be “reasonable.” The non-compete cannot extend beyond a necessary geographic area or period of time. While it might be desirable from the employer’s perspective to prevent key employees from working with a related business anywhere in the country, Washington courts generally will not enforce such a non-compete. A non-compete usually cannot prevent former employees from working entirely in their chosen field or require them to move across the country. The key is that the employee must be able to continue work in their chosen profession.
3. Would enforcing the noncompete create a possibility of harm to the public?
Even if a noncompete covenant is necessary to protect the employer’s business, and is appropriately tailored to do so, enforcing the agreement must not create the possibility of harm to the public.[1] If, for example, enforcing the agreement would deny the public access to necessary services, the agreement may not be enforceable. One can imagine scenarios in which such an argument would be made—like where enforcing a non-compete would cut a community off from access to emergency ambulance services or trash collection.
Finally, in Washington an enforceable non-compete agreement must offer some consideration, or value, to the employee for signing it. The consideration may be hiring the employee in the first place, but continued employment is not enough—a non-compete signed under a threat of termination, for example, is not enforceable. After on-boarding, employers must provide new consideration, such as a pay raise, bonus, a promotion, a fixed term of employment, or access to protected information. Training or instruction received after signing a non-compete might constitute additional consideration, but only if the employee would not have received it otherwise—to use an example from above, training a sandwich-shop cashier how to use the register is not enough.[2]
State legislators can limit or expand the enforceability of non-compete agreements. California’s Business and Professions Code has generally banned non-competes for almost 150 years. More recently, the legislature in Massachusetts introduced legislation that would restrict non-competes. (HB 2903, for instance, would have prohibited enforcement if the employee is terminated during a probationary period, if the employee makes below a certain salary, or works below a certain number of hours; SB 6526 was even more restrictive, but neither bill was brought to a vote.) And, as discussed in the recent post to this blog referenced above, Washington has just joined in this trend.
[1] Emerick v. Cardiac Study Ctr., Inc., P.S., 189 Wn. App. 711 (2015).
[2] Labriola v. Pollard Group, Inc., 152 Wn.2d 828 (2004).
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.