United States: Washington State Enacts Comprehensive Noncompete Reform

On May 8, 2019, Washington Governor Jay Inslee signed Engrossed Substitute House Bill 1450 (HB 1450), radically altering the law governing noncompetition agreements and moonlighting prohibitions in Washington State. The bill will become effective on January 1, 2020, but includes provisions for retroactivity. Employers with Washington operations that have (or want) such agreements with their employees, or that are considering hiring individuals who have entered into such agreements with other employers, need to understand the new restrictions.

New Minimum Requirements for Noncompetition Agreements in Washington

HB 1450 imposes significant restrictions on all contracts containing noncompetition covenants in Washington State. This article discusses its most significant aspects for employers doing business in Washington.

1. Definitions and Coverage

HB 1450 imposes restrictions on noncompetition covenants with both employees and independent contractors. Noncompetition covenant is defined as every written or oral agreement restraining an employee or independent contractor from engaging in a lawful profession, trade, or business. As discussed below, however, some types of restrictions are not affected by the new law, including nonsolicitation agreements and sale-of-business noncompetes.

2. Minimum Compensation Amount

The law makes Washington the first state to set minimum compensation thresholds for noncompetition covenants with employees and independent contractors. Once the law becomes effective, noncompetition covenants will be per se "void and unenforceable" against employees earning less than $100,000 annually from the party seeking to enforce them. Noncompetition covenants with independent contractors are similarly "void and unenforceable" unless the contractor earns at least $250,000 annually from the party seeking enforcement. These compensation thresholds will be adjusted for inflation yearly by the Washington State Department of Labor and Industries.

3. Prior Notice and Consideration Requirements

Employers must disclose the terms of the noncompetition covenant in writing to prospective employees no later than the time the employee accepts an offer of employment. This will make it advisable that employers hiring Washington-based employees present the terms of noncompetition agreements along with offer letters so that individuals have the opportunity to consider the agreements as part of deciding whether to accept employment. In addition, codifying existing Washington case law, HB 1450 requires that noncompetition covenants entered into after the start of employment be supported by independent consideration—continued at-will employment is insufficient. While the law does not define what constitutes sufficient "independent consideration," courts generally hold that consideration can include items such as increased wages, a promotion, a bonus, or a fixed term of employment.

4. Restrictive Periods Greater Than 18 Months Are Presumed Unenforceable

The statute creates a presumption that noncompetition agreements with a restrictive period extending beyond 18 months after the termination of employment are unreasonable and unenforceable. Employers can overcome this presumption only by proving through "clear and convincing evidence" that a longer restrictive period is necessary to protect the employer's business or goodwill. The duration of a noncompetition covenant between a performer and a performance space, or a third-party scheduler, must not exceed three calendar days.

5. "Garden Leave" for Laid-Off Employees

If an employer wishes to enforce a noncompetition covenant against an employee terminated as a result of a layoff, the employer must provide compensation equivalent to the employee's base salary at the time of termination (minus compensation earned through subsequent employment) for the entire period of enforcement. The new law does not define what constitutes a "layoff" as opposed to, for example, termination without cause when the position is retained.

6. Choice-of-Venue and Choice-of-Law Restrictions

Choice-of-venue provisions in noncompetition agreements that require adjudication of disputes outside of Washington State will be unenforceable if the employee or independent contractor is "Washington-based." The new law does not define "Washington-based." However, in deciding choice-of-law issues, Washington courts have focused on the location of the employee's work site and residence as principal guiding factors.

The new law also invalidates attempts to contract around its restrictions through choice-of-law provisions. Specifically, HB 1450 renders "void and unenforceable" any contract provision "to the extent it deprives the employee or independent contractor of the benefits" of the law.

7. Damages Owed to Employees if Noncompetition Covenants are Modified or Only Partially Enforced

If a court or arbitrator determines that a noncompetition covenant violates the new law, or "reforms, rewrites, modifies, or only partially enforces" a noncompetition covenant, the employer is required to pay the employee actual damages or a statutory penalty of $5,000, whichever is greater, plus reasonable attorneys' fees, expenses, and costs incurred. Employers should therefore carefully consider the potential impact of HB 1450 on their traditional drafting and enforcement approaches. For example, if a covenant contains a broad geographic restriction as well as a customer-based restriction, and the employer seeks to enforce only the customer-based restriction, the employer will potentially be liable for damages and attorneys' fees due to the partial enforcement of the covenant.

This is a significant departure from current Washington law, which allows courts full freedom to modify noncompetition agreements to enforce them to the extent they are reasonable. HB 1450 penalizes employers for this kind of partial enforcement, and indicates a clear legislative intent to incentivize employers to draft restrictions narrowly. This may prove to have a significant deterrent effect on employer enforcement of noncompetition agreements even if a former employee is engaging in conduct that clearly violates arguably-enforceable portions of his or her post-employment restrictions.

8. "Moonlighting" and "No-Poach" Restrictions

In addition to significantly restricting the use of noncompetition agreements, HB 1450 also restricts "no moonlighting" policies and, for franchise operations, so-called "no poach" agreements. Specifically, with respect to moonlighting, the new law provides that employers may not "restrict, restrain, or prohibit" employees earning less than twice the applicable state minimum hourly wage from having another job or otherwise supplementing their income, either as a contractor or through self-employment (subject to the common law duty of loyalty and laws and policies preventing conflicts of interest). Further, franchisors are prohibited from restricting franchisees from soliciting or hiring away employees of the franchisor, or of other franchisees.

9. Conflicting Law Displaced

The new law displaces "conflicting tort, restitutionary, contract, and other law" pertaining to liability for competition by employees or independent contractors, other than claims under the Uniform Trade Secrets Act.

10. Carve Outs for Nonsolicitation Agreements and Other Restrictions

The definition of regulated "noncompetition covenants" specifically excludes (a) nonsolicitation agreements; (b) confidentiality agreements; (c) agreements prohibiting the use or disclosure of trade secrets or inventions; and (d) covenants (including noncompetition covenants) entered into in conjunction with the purchase or sale of a business. Nonsolicitation agreements excluded from coverage are specifically defined to cover those that prohibit solicitation of existing employees or existing customers of the contracting employer. The definition of "noncompetition covenants" also excludes covenants entered into by a franchisee, but as already noted, "no poaching" agreements by franchisees are separately prohibited.

11. Retroactive Application

The new law purports to apply not only prospectively, but also to "all proceedings commenced" on or after January 1, 2020, "regardless of when the cause of action arose." This language indicates that HB 1450 is intended to apply to noncompetition covenants entered into prior to January 1, 2020, if an employer sues to enforce them after January 1, 2020. How this will play out with respect to specific provisions of the law is unclear. For example, neither the text of the statute nor its legislative history answers whether the legislature intends to invalidate existing agreements simply because they were presented to an employee after the employee signed an offer letter and without provision of independent consideration.

The new law does place some limits on its intended retroactive effect. Specifically, HB 1450 provides that a "cause of action may not be brought regarding a noncompetition covenant signed prior to" the act's effective date "if the noncompetition covenant is not being enforced." Although the law does not define what constitutes "enforcement" of a noncompetition covenant, this language appears generally to prohibit workers from filing declaratory judgment actions to invalidate contracts signed prior to January 1, 2020, based solely on the new restrictions contained in HB 1450. This prohibition likely limits companies' exposure to litigation (including class litigation) seeking to invalidate covenants pre-dating the new law merely to recover the statutory penalty of $5,000, along with attorneys' fees and costs.

HB 1450's retroactive effect may be subject to challenge as a substantial impairment of contractual relationships within the meaning of the U.S. Constitution's Contracts Clause. However, a statute does not violate the Contracts Clause simply because it has the effect of restricting—or even barring altogether—the performance of duties created by previously entered contracts. As such, the outcome of any such challenge is uncertain.

Practical Considerations

Employers with Washington operations should carefully review their existing noncompetition agreements, offer letters, and policies to ensure they comply with HB 1450 before the law takes effect. For example, employers should consider incorporating a garden leave provision in their noncompetition agreements in the event of employee layoffs, and should review the scope and term of noncompetition covenants, as well as their choice-of-law and choice-of-venue provisions, for Washington-based employees. Depending on the extent to which employers rely on noncompetition agreements in Washington, as well as the terms of existing agreements, it may be advisable to roll out entirely new agreements supported by independent consideration. Because of the significant changes imposed by the law, employers should consult with experienced employment counsel when drafting or proposing noncompetition agreements for Washington-based workers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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