In 2019, the Washington legislature enacted a statute, what is now RCW 49.62, to guide the enforceability of non-competes in the employment context. This law came into effect January 1, 2020. Since the law was enacted, there have been some cases that now interpret the law and clarify its application. However, some questions still remain. Below we will discuss the law and its current interpretation to determine what types of non-competes are enforceable.

1. Notice Requirements for Non-Competes.

In Washington, a non-compete is void and unenforceable under the Non-Compete Act unless the employer gives the employee written notice of the terms of the non-compete before the employee accepts the offer of employment. See RCW 49.62.020(1)(a)(i).

A separate notice is additionally required is when an employee does not make the required pay to meet the threshold (discussed below) at the time of signing the agreement, but the employer requires the employee to sign a noncompetition covenant because the employee might ultimately exceed the baseline threshold. The employer then must “specifically disclose that the agreement may be enforceable against the employee in the future.” RCW 49.62.020(1)(a)(i).

If you were not given notice of the terms of the non-compete at the time of commencement of the non-compete, the non-compete is not enforceable. Likewise, if you were not given notice that a non-compete could be enforceable against you in the future once you meet the pay threshold, then the agreement is likely to be found unenforceable.

2. General timing requirements, “mid-Stream agreements”, and adequate independent consideration.

Although not a new concept, for a non-compete to be enforceable, it needs to be supported by adequate independent consideration. The act now codifies that a non-compete is unenforceable if it is entered into after the commencement of employment, unless the employee receives adequate independent consideration. See RCW 49.62.020(a)(ii).

This means that if an employer has an employee sign a non-compete in the middle of employment or “mid-stream”, “independent consideration is required at the time promises are made for a non-compete agreement when employment has already commenced.” Labriola v. Pollard Group, Inc., 100 P.3d 791, 792 152 Wash. 2d 828 (2004). “Independent consideration may include increased wages, a promotion, a bonus, a fixed term of employment, or perhaps access to protected information.” Id. at 794.

In Labriola, (pre-enactment of RCW 49.62) the employee signed a non-compete five years after he began working for the employer, but signed a different non-compete when he started his job. The later agreement barred the employee from working for competitors within a 75-mile radius of the employer for three years after the termination of his employment. After signing the ladder agreement, the employee remained at-will and received no additional benefits, duties or increase in pay. Id. at 795. The Washington Supreme Court entered summary judgment for the employee finding that the non-compete agreement was not validly formed because it was not supported by additional consideration. Id. RCW 49.62.020(a)(ii) now codifies the requirements in Labriola for adequate independent consideration when a non-compete is entered into post-employment.

However, some courts will still hold that an agreement was entered into prior to employment, even if the agreement is oral. In A Place for Mom, LLC, the court granted a motion for preliminary injunction against the employee. In the relevant part of the holding, under RCW 49.62.020(1)(a)(i), the alleged acceptance of prior verbal job offer did not invalidate the noncompetition covenants in a later written noncompete agreement, because the terms of the noncompete agreement accompanied an actual written offer letter, accepted by the defendant, which superseded any alleged prior verbal job offer.

In short, if a non-compete was signed or agreed to “midstream” by the employee after the commencement of employment but the employee was not given additional pay, duties, or benefits, the covenant is likely not validly formed and unenforceable.

3. Wage Thresholds for Non-Competes.

Under the Non-Compete statute, if an employee’s compensation is less than certain pay thresholds, a non-compete is void and unenforceable as a matter of law. In 2020, the pay thresholds required for a non-compete to be enforceable were $100,000,00 for an employee, and $250,000.00 for an independent contractor.

These limits are adjusted yearly to account for inflation and are calculated based on the employee or independent contractor’s previous calendar year Form W-2 (Box 1) or Form 1099. The “previous year” is determined as of “the date of separation” or “the date enforcement of the noncompetition covenant is sought, whichever is earlier.”

The 2023 thresholds have raised to $116,593.18 for a W-2 employee, and $291,482.95 for an independent contractor. For 2024, the thresholds were raised to $120,559.99 for an employee and $301,399.98 for an independent contractor. You can view the current wage thresholds for the Non-compete law in Washington here.

In Robins, the court denied a motion for preliminary injunction against former medical device sales employees. See Robins v. NuVasive, Inc., No. 2:20-CV-292-RMP, 2020 WL 7081588 (E.D. Wash. Dec. 3, 2020) (unpublished). The court found that the noncompetition covenants in the employment agreements were likely unenforceable because the employees did not earn the required income threshold at the time the agreements were signed, and the agreements did not contain the required notification of potential future enforceability in the event the statutory income threshold was reached during employment.

Therefore, as the statute reads, and as held in Robins, if the employee or independent contractor made less than these thresholds in the prior year, generally, the non-compete provision is void and unenforceable.

4. “Temporal” Length or Time Restrictions for Non-Competes.

Prior to January 1, 2020, the length of time that a non-compete was enforceable as long as it was “reasonable.” The statute now clarifies what is reasonable. Under RCW 49.62.020(2), there is now a rebuttable presumption that non-compete with restrictive periods longer than eighteen (18) months are presumed unreasonable, unless the employer can prove that a longer duration is necessary by clear and convincing evidence.

In a case in federal court in Washington, a court found that a non-compete preventing workers from working with competitors for a three-year period was not reasonable, overbroad, and unenforceable. In Prime Group, Inc. v. Dixon, No. 2:21-CV-00016-RAJ, 2021 WL 1664007 (W.D. Wash. Apr. 28, 2021), a trial court denied a motion for preliminary injunction, finding that both a three-year restrictive period and a geographic scope covering all of Washington State and California were presumptively void and unenforceable against former data center executive who defected to a competing company. Absent a production of “clear and convincing” evidence supporting a restricted period longer than 18 months, on a motion for preliminary injunction, the motion would be denied as lacking likelihood of success on the merits of the underlying noncompete claim.

Therefore, under RCW 49.62.020(2) a court or arbitrator must presume that any noncompetition covenant with a duration exceeding eighteen months after termination of employment is unreasonable and unenforceable.

5. Geographic Scope Restrictions.

Unlike, temporal length, there is no set limit on how broad the geographic scope of a non-compete can be. But Washington law has general restrictions on overbroad geographic scopes and does not permit sweeping restrictions on individuals’ ability to work that are not reasonably necessary to protect the employer’s legitimate business interests. See Labriola v. Pollard Group, Inc.,100 P.3d 791, 800 (2004). Such a restriction would be a general ban on competition, not “a reasonable restriction on unfair competition.” See also Amazon.com, Inc. v. Moyer, 417 F. Supp. 3d 1388, 1398 (W.D. Wash. 2019).

As stated above, a recent case dealt with a geographic scope that prevented former employees from operating anywhere in Washington and California. In Prime Group, Inc.(discussed above), the court found this restriction of two hole states to be overbroad and unenforceable.

Therefore, depending on how broad the non-compete is, will determine the enforceability. The broader the geographic scope, (or the fact that it is unlimited in geographic scope), the more likely it will be found to be unenforceable.

6. Does a choice of law provision from another state render the non-compete unenforceable?

A choice of law clause applying another state’s law or a choice of venue clause requiring a “Washington-based” employee or independent contractor to litigate a non-competition covenant in another jurisdiction is void and unenforceable. See RCW 49.62.050(1). (“A provision in a noncompetition covenant signed by an employee or independent contractor who is Washington-based is void and unenforceable: …(1) If the covenant requires the employee or independent contractor to adjudicate a noncompetition covenant outside of this state.”)

Simply put, non-competes in Washington for a Washington-based employee cannot have an out-of-state choice of law or venue provision. Such provisions make the entire covenant void and unenforceable.

At least one Washington court has already correctly held that an out-of-state choice of law provision renders a non-compete void and unenforceable. See CVS Pharmacy Inc., v. Brown, No. C21-306 MJP (W.D. Wash. Mar. 23, 2021) (“The Court finds that the Washington Noncompete Act renders CVS’s non-compete unenforceable because it requires Brown ‘to adjudicate a non-competition covenant outside of’ Washington. RCW 49.62.050.”)

Thus, if your non-compete has an out-of-state choice of law provision for you, as a Washington-based employee, there is a strong argument that the non-compete provision is entirely unenforceable under RCW 49.62.

7. “Layoff” Requirements.

The way in which an employee is terminated can determine whether a non-compete will be enforced. Specifically, the statute institutes certain requirements if an employee is the subject of a “layoff”:

“A noncompetition covenant is void and unenforceable against an employee: … If the employee is terminated as the result of a layoff, unless enforcement of the noncompetition covenant includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.” RCW 49.62.020(1)(c).

The statute does not define the term “Layoff,” but it commonly means (1) a period of inactivity or idleness, or (2) the act of laying off an employee or a workforce. https://www.merriam-webster.com/dictionary/layoff.

What this means practically, is that if a person is laid off, their “position was eliminated” or someone was terminated due to a “reorganization” a non-compete is not enforceable unless an employee is paid their equivalent base pay during the duration of a non-compete.

8. Can a so-called “non-solicitation” be found to be a non-compete under Washington law?

The law regarding whether a non-solicitation can be found to be a non-compete, and thus have the statute apply to it is still developing. However, it is possible that a non-solicitation can be found to be a non-compete. The statute currently defines a non-compete broadly, stating the following:

“Noncompetition covenant” includes every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind. A “noncompetition covenant” does not include: (a) A nonsolicitation agreement; (b) a confidentiality agreement; (c) a covenant prohibiting use or disclosure of trade secrets or inventions; (d) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (e) a covenant entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1).

“Non-solicitation” is defined narrowly:

(5) “Nonsolicitation agreement” means an agreement between an employer and employee that prohibits solicitation by an employee, upon termination of employment: (a) Of any employee of the employer to leave the employer; or (b) of any customer of the employer to cease or reduce the extent to which it is doing business with the employer.

As you can see, the statutory definition of “non-compete” under Washington law is broad and the definition of “non-solicitation” is narrow. Non-compete covenants are broadly defined and include “every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.” RCW 49.62.010 (4). The definition of a non-compete specifically excludes non-solicitation agreements, which are narrowly defined, and prohibit, in part, solicitation “of any customer of the employer to cease or reduce the extent to which it is doing business with the employer.” Id. (5).

In neighboring Oregon, a couple of cases have found that non-competes can sometimes “masqueradie” as non-competes, and can nonetheless be found to be non-competes. For example, Oregon courts have found that a non-solicitation that attempts to avoid the solicitation of “prospective clients” is actually a non-compete and will thus not be enforced if it violated the provision within its statute. Although not yet decided definitively in Washington law, Oregon courts have found that preventing an employee from contacting or soliciting clients and including “prospective clients” is “much broader” than an agreement not to merely solicit or transact business with Defendants’ customers. See Aitkin v. USI Insurance Services, LLC, No. 2: 21-cv00267-HZ (D. Or. Feb. 26, 2021), quoting Naegeli Reporting Corp. v. Petersen, No. 3:11-1138-HA, 2011 WL 11785484, at *4 (D. Or. Dec. 5, 2011) (where a nonsolicitation did “not merely restrict defendants from soliciting clients they had actual contacts with while employed by plaintiff” but, rather, precluded “defendants from engaging in conduct that even indirectly divert[ed] former or prospective customers from plaintiff.”) A covenant that prohibits a former employee from “directly or indirectly” soliciting, diverting, inducing, or servicing business from current or prospective clients “should be construed as a non-competition agreement.” Id.

For example, in an unpublished opinion in Washington, the court in Robins in part concluded that restriction on sales employees “representing, promoting, or otherwise trying to sell in the territory they served” was a covered noncompetition covenant, not excluded nonsolicitation agreement, for purposes of RCW 49.62.010(4) and (5). See Robins v. NuVasive, Inc., No. 2:20-CV-292-RMP, 2020 WL 7081588 (E.D. Wash. Dec. 3, 2020)

Therefore, it is possible that if an employer attempts to prevent a former employee from contacting “prospective customers” or other groups of people outside of “active customers”, courts may be able to find that RCW 49.62 nonetheless applies to the agreement.

9. Is there a penalty for the employer creating an “overbroad agreement”?

RCW 49.62 changed the rules for non-competes and specifically disallowed employers from enforcing overbroad non-competes against employees. The law was codified in the statute RCW 49.62.

Specifically, the legislature gave the statute some “teeth”, and if a court or arbitrator concludes that a covenant violates the statute, or if it revises, rewrites, or only partially enforces a covenant, the court or arbitrator shall award the ex-employee a $5,000 statutory penalty plus his or her attorney fees, expenses, and costs. See RCW 49.62.080. What this means practically speaking is that if the employer attempts to enforce an agreement against an employee, especially if there are any revisions necessary, or any part is found to be unenforceable, it will be charged a $5,000 penalty, and be required to pay the employee back for the money you spend to mount a defense. Simply put, there are likely consequences if an employer tries to enforce an agreement that is drafted with a long time period for enforcement or an exceptionally wide geographic scope.

In a couple of cases, the employee tried to apply this provision to what people arguably believed were at least non-competes in part. However, in Washington, it does not appear that this argument has been successful.

For example, in Wellspring Fam. Servs. v. Owen, No. 82128-8-I, 2021 WL 4724352 (Wash. Ct. App. Div. I, October 11, 2021) (unpublished), a mental health therapist was subject to her former employer’s nonsolicitation agreement, restricting her from providing services to the employer’s clients for 12 months after the termination of her employment. After being sued by her former employer to enforce the agreement, the employee brought a counterclaim alleging that the customer/patient nonsolicitation agreement violated chapter 49.62 RCW. The state Superior Court dismissed the counterclaim on a 12(b)(6) motion, and the former employee appealed. The court ruled against the employee, concluding that Chapter 49.62 did not apply to the nonsolicitation agreement, and that a 12-month lookback definition for mental health therapy “clients” fell within statutory definition of “customer” for purposes of RCW 49.62.010(4)–(5)’s coverage exception for customer nonsolicitation agreements.

In A Place for Mom v. Perkins, 475 F. Supp. 3d 1217 (W.D. Wash. 2020) a contractual provision prohibiting solicitation of “referral groups . . . and their representatives” fell within statutory definition of nonsolicitation agreement excluded from covered “noncompetition covenant” under RCW 49.42.020(4)–(5).

CONCLUSION

Navigating the Complexity of Restrictive Non-Competes: Consult with Colin F. McHugh, a Seasoned Employment Lawyer in Vancouver, Washington!

Restrictive covenants, especially non-competes can be very complicated and require review by an experienced attorney to determine their enforceability.

Colin F. McHugh is an employment lawyer in Vancouver, Washington, is licensed in both Washington and Oregon, and has over 10 years of experience advising clients and litigating employment contract issues on behalf of individuals including restrictive covenants such as non-competes, non-solicitations, trade secrets, and other related issues. If you would like to schedule a consultation with Mr. McHugh, please fill out an intake questionnaire below.

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