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May 18, 2016
Your Company’s Non-Compete Agreement: You May Not Be As Protected As You Think
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As a conscientious business owner who has spent vast amounts of time and money building your company and clientele, you may have chosen to protect your business by having a few key employees sign non-compete agreements.  You may have even gone a step further by preparing a standard non-compete form for all of your employees to sign.  You probably think that your business, your confidential information, and your client lists are protected.  Under Washington law, you may be wrong.

Non-compete agreements are contracts in which employers restrict prospective or current employees from directly or indirectly competing with their business for a general period of time and within a general geographic area after the employee terminates his or her employment.  Most employers see non-compete agreements as necessary to protect the business’ proprietary or confidential information.  Some legislators favor non-competes to encourage employers to invest in training their employees, since the employer can be assured that the employee will not be able to use that training to compete against the employer in the future.

On the other hand, some have called for legislation completely banning non-compete agreements in Washington, and the Washington Legislature seems to be listening.  For example, two bills first read in the 2015 Regular Session and reintroduced by resolution in the 2016 Regular Session, HB 1577 and HB 1926, would severely undermine, if not eliminate, the enforceability of future non-compete agreements.  HB 1577 would make non-compete agreements for low-wage positions unenforceable, among other things.  Going a step further, HB 1926 would render all non-compete agreements void, except in the case of a business sale.  Proponents of the bills, including many in the technology industry, praise the efforts as necessary to stimulate entrepreneurial activity and allow workers the freedom to choose where to work.  If Washington were to pass such laws, it would join California and Hawaii in a small group of states that prohibit the use of non-compete agreements. 

Currently, non-compete agreements are legal and enforceable in Washington.  However, different industries have particularized rules and regulations about covenants not to compete.  You may want to talk to an attorney to determine whether there are any restrictions in your specific industry.

The well-established law in Washington is that covenants not to compete will be enforceable if they are reasonable, which involves consideration of three factors (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 non-enforcement of the covenant.  See Knight, Vale and Gregory v. McDaniel, 37 Wn. App. 366, 369, 680 P.2d 448 (1984).  Even when a non-compete is reasonable, it may fail for lack of consideration, meaning that the agreement lacks a bargained-for exchange of promises. 

The good news for employers is that Washington is a “blue pencil” state, meaning that a court has the discretion to rewrite unreasonable non-compete provisions.  Of course, to avoid the cost of litigation and the uncertainty of a judge rewriting the agreement, employers should seek to draft reasonable covenants at the outset.

In light of Washington precedent, here are some best practice tips for businesses in drafting and/or revising existing non-compete agreements:

1.         Determine Whether you Need a Non-Compete Agreement.

Prior to even drafting a non-compete agreement, businesses should decide whether a non-compete is even necessary.  Here are some things to consider:

  • Do I have proprietary/trade secret information that is vital to my business?
  • Do I have a legitimate business interest in maintaining my clientele?
    • Have I gone to great lengths to obtain clients?
    • How much of my clients’ information do I have?
    • How close are my relationships to my clients?
    • Would my clients’ information be easily obtained by a competitor?
  • Do I have a legitimate interest in protecting the goodwill I have developed in the community?
  • Will my employee be privy to my proprietary and/or confidential information?  Is access to and use of my proprietary and/or confidential information necessary for my employee to perform her job?
  • Do I provide my employees with extensive training?  Will my employees have any unique or highly specialized skills?

If the answer to some, most or all of these questions is “yes,” you likely have a legitimate interest in protecting your business and goodwill.  You may consider having an attorney draft non-compete agreements for your current or future employees. 

2.         Be Reasonable!

An unreasonable covenant not to compete will not be enforceable in Washington.  The covenant must be reasonable in terms of (1) geography, (2) duration and (3) scope.  A court will consider these in the context of the entire covenant, instead of independently. 

Determine what your competition range is and try to narrow the restriction to that reasonable range.  For example, if your business operates within a 100-mile radius, it is unreasonable to prohibit your former employee’s competition within a 1,000-mile radius.  Also consider the temporal limitations on competition.  One Washington court recently wrote that a four or five year temporal term in a non-compete covenant may not be per se unreasonable.  See Emerick v. Cardiac Study Center, Inc. P.S., 189 Wn. App. 711, 727, 357 P.3d 696 (2015).  However, a reasonable temporal restriction will depend on the employment context and geographic restriction. 

Finally, tailor the non-compete to the specific employee.  A non-compete that forbids an employee from working for any other company within the same industry or precludes the employee from accepting a position within the same industry unrelated to her current position (and where her skills and/or knowledge would not be utilized) is likely too broad and therefore unreasonable.  Like geographic and temporal restrictions, what constitutes a reasonable scope of the covenant not to compete will be highly fact-driven. 

3.         Execute the Non-Compete Early. 

The general rule in Washington is that consideration exists if the employee enters into a non-compete agreement when he or she is first hired.  Labriola v. Pollard Group, Inc., 152 Wn.2d 828, 834, 100 P.3d 791 (2004).  Future employment and job training serve as the employer’s consideration in exchange for the employee’s execution of the non-compete.  By conditioning employment upon the potential employee’s execution of a reasonable covenant not to compete, you ensure that the agreement has consideration. 

4.         You Must Give Something to Get Something.

What happens if you don’t have an employee sign a non-compete at the outset of her employment?  Will a non-compete agreement that you ask her to sign subsequently be enforceable?  The answer here is: “It depends.”

A non-compete agreement entered into after employment has already commenced will be enforceable only if it is supported by independent consideration.  Labriola, 152 Wn.2d at 834.  In other words, you cannot ask your employee to sign a non-compete agreement after she is already employed without making some new promise or undertaking some additional obligation.  Independent consideration may include increased wages, a promotion, a bonus, a fixed term of employment (promise of future employment), or access to protected information.  Id.  In short, if you want your existing employee to sign a non-compete agreement, you must give her an extra benefit.

This list is not exhaustive.  There may be other factors for you to consider.  We suggest you consult with an attorney before entering into a non-compete agreement.

If you have any questions about covenants not to compete or would like to speak with an attorney about your potential or existing non-compete agreements, please contact us.

Disclaimer

This advisory is a publication of Eisenhower Carlson PLLC. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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