Are Noncompete Laws Like California’s Coming to Washington State?

 

By Alston Lew and Jason Fellner April 16, 2019
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California law significantly restricts employer use of noncompetition agreements, and proposed legislation in the state of Washington seeks to mirror the Golden State's laws. Here's what employers need to know.

A noncompete agreement is a written and signed contract between an employee and an employer that forbids the employee, for a stated time, from working for a new employer engaged in the same type of business and in the same market as the prior employer. These agreements are triggered when employees leave their job and seek a new opportunity.

Critics of noncompete agreements in Washington believe these contracts hinder innovation by restricting the flow of ideas. These critics typically point out that in states where noncompete agreements are banned, employees can move freely between jobs, and this fosters innovation and creativity.

In addition, critics of noncompetes point out that such agreements have been applied to construction workers, musicians, media professionals and retail employees, which unnecessarily stifles progress in those industries.

[SHRM members-only multistate coverage: Multistate Employer Resources]

In contrast, proponents of noncompetes believe companies should be allowed to protect their business from unfair competition, prohibit the improper use of proprietary information and stop rivals from soliciting employees.

In Washington, some large companies have used noncompete agreements to stop former employees from working for rivals and have resisted any changes to the existing law governing noncompete agreements.

California Law

California law is protective of an employee's freedom of movement from one employer to another. As a result, noncompete agreements are generally void in the state: The California Business and Professions Code Section 16600 states, "Every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is void."

California courts have repeatedly ruled that the public good is served by ensuring that citizens retain the right to pursue any lawful employment and enterprise of their choice, with some exceptions.

Accordingly, California courts protect the right of employees to move to different employers even if their employment contract contains a provision indicating that the contract is governed by the laws of a different state that allows noncompete agreements.

California law has some exceptions, with two notable examples cited. For instance, if a noncompete agreement was created in a different state, and the case was filed with a non-California court but subsequently transferred to California, courts in California may apply the original court's laws.

Another exception involves the sale of a business, which includes:

  • When a person sells the goodwill of the business—meaning the value of the brand name, customer base, proprietary information and other aspects of the business.
  • When the owner sells his or her entire interest in a business.
  • When the owner sells essentially all of the operating assets, along with the goodwill of the business.

Washington Law and Proposed Legislation

Under current Washington law, noncompete agreements are valid if the terms are reasonable. Courts consider three factors to determine reasonableness:

  • Whether restraint is necessary to protect the business or employer's goodwill.
  • Whether the restraint on the employee imposes any greater limitations than what is reasonably necessary to secure the employer's business or goodwill.
  • Whether the loss of the employee's service and skill so injures the public that the agreement shouldn't be enforced.

Also, in evaluating reasonableness, Washington courts consider the amount of time the noncompete covers and its geographic scope. Courts can also reform the terms of unreasonable noncompete agreements.

On Feb. 15, 2019, however, Democratic Sen. Marko Liias introduced legislation that will restrict noncompete agreements in employment contracts. The Engrossed Substitute Senate Bill (ESSB) 5478 would dramatically alter existing Washington law on noncompete agreements by:

  • Making noncompete covenants unenforceable unless an employee earns more than $100,000 a year.
  • Creating a presumption that a noncompetition covenant that applies for more than 18 months is unreasonable and unenforceable.
  • Establishing other provisions related to competition and remedies. The bill would make noncompete agreements unenforceable against independent contractors unless their earnings from a hiring business exceeds $250,000 a year. 

If the proposed legislation becomes law, employers that violate it may be subject to the greater of actual damages or $5,000, plus reasonable attorney fees, expenses and costs.

A similar bill in the state House of Representatives, H.B. 1450, has an additional provision stating that an employer may not restrict or prohibit an employee earning less than twice the state's minimum wage from having an additional job or supplementing his or her income by working for another employer, working as an independent contractor or being self-employed. The House has until April 17 to ratify its version, which was authored by Rep. Derek Stanford, D-Bothell.

The current legislative session ends April 28. Legislative action on the House and Senate bills at the end of April will determine the bills' fates and which version is put forward for a floor vote.

Growing Trend

Washington's legislative efforts follow the trend of several other states that have recently proposed or adopted laws placing restrictions on noncompete agreements, including Idaho, Illinois, Massachusetts, New Jersey, New York and Utah. As this trend continues, employers in other locations should be aware that noncompete agreements may increasingly be regarded as an unpopular employment restriction.

Alston Lew is an attorney with Murphy Pearson Bradley & Feeney in San Francisco. Jason Fellner is an attorney with Murphy Pearson Bradley & Feeney in San Francisco and Seattle. 

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