Washington State is set to Sharply Limit Non-Compete Clauses in Employment and Contractor Agreements.

Effective January 1, 2020, Washington State will prohibit enforcement of non-competition covenants against employees and independent contractors whose annual earnings are less than or equal to $100,000 and $250,000, respectively.  These thresholds will be increased annually to reflect inflation.  Not included in the definition of non-competition covenants are non-solicitation clauses, confidentiality provisions, non-competition covenants entered into in connection with the purchase of a business and franchisee covenants entered into in connection with the purchase of a franchise.  For executives and other employees and independent contractors earning above the thresholds, non-compete periods in excess of 18 months will be presumed unreasonable. If the executive is laid-off, the employer cannot enforce the non-compete unless it pays the executive his or her base salary for the enforcement period less any wages the executive earns in another job during that period. Employers who run afoul of the new law will also be charged attorney’s fees in litigation.  Readers interested in more detail can find the text of the act at Washington State's New Law Curtailing Non-Competition Covenants.

The legislators had good reason to carve out non-solicitation and confidentiality provision from the restrictions the new law imposes on non-competition covenants.  A well-drafted non-solicitation provision prevents a departing employee from raiding customers or colleagues. Confidentiality provisions prevent a departing employee from using the employer’s trade secrets and intellectual property in his or her new position.  Together, these two clauses accomplish many of the goals that an employer would hope to achieve with a non-competition covenant without severely limiting the ability of their employees to find gainful employment at other companies.

However, employers will face challenges in the absence of non-competition covenants.  It is much simpler to prove that a former employee took a new position with a competitor than to show that he transferred technology from the former employer to his new employer in violation of a confidentiality clause.  In fact, in the absence of a non-competition covenant, the former employer will often have no idea whether or which of its secrets are being shared with competitors.

The legislature’s use of salary thresholds reflects the generally accepted assumption that the more senior an executive is, the more likely she can harm her former employer by taking a position with a competitor. Therefore, when drafting an employment agreement for a senior executive, non-competition covenants are important and will continue to be used. Whether counsel is representing the executive or the employer, it is good practice to use a detailed definition of the field or market niche that the employer occupies.  Years later when there is a dispute concerning whether the executive can join a different company, the detailed definition will clarify whether the new company is in the same field or market niche as the old one and whether the non-competition covenant is triggered. 

All too often, however, company counsel drafts boiler plate non-competition covenants that simply prohibit the employee from working for any other undefined “technology” company or any undefined “competitor” for a period of two to three years or longer. Senior executives can afford to hire counsel and negotiate more reasonable terms.  For other employees, these boiler plate provisions are contracts of adhesion.  Their choice is to sign the agreement or not get that job.

But cutting-edge technology becomes widespread in a year or so and there is little need to protect such business information.  It is also common knowledge that most firms are in niche markets and often have only a handful of true competitors.  Since the boiler plate covenants often ran too long and were overbroad, judges were loath to enforce them, especially against programmers and lower-level employees. Therefore it is no wonder that Washington’s legislators took draconian action. Large employers will no longer be permitted to misuse their market power and deploy non-competition covenants like blunt instruments when surgical precision is what the market needs and the law now effectively requires.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.