On May 8, Gov. Jay Inslee signed a new law that may upend how noncompetes are used with physician employees. Beginning Jan. 1, 2020, the law will apply to all new and existing noncompetition covenants with employees and independent contractors.
Major health systems across Washington have routinely required physicians to sign expansive noncompetition agreements, though this common practice had little risk.
However, the new law imposes a potentially sizeable cost for overly broad restrictions. It says that an employer must pay the employee’s damages (with a minimum damage amount of $5,000) plus attorney fees, costs, and expenses if a court “reforms, rewrites, modifies, or only partially enforces any noncompetition covenant.”
Employers used to win even when the covenants were overly broad, but as evidenced by a recent case, the new law could change this outcome.
In Emerick v. Cardiac Study Center, Inc., P.S., a cardiologist challenged a noncompete that lasted for five years and covered Pierce County and Federal Way. The court found the noncompete unreasonable when it balanced the interests of the medical group against the public policy interest of maintaining the physician-patient relationship.
Rather than throwing out the noncompete, the court modified the noncompete to make it reasonable. The court reduced the geographic restriction from Pierce County and Federal Way to a two-mile radius around the medical group’s current offices, reduced the time restriction from five years to four, specifically allowed the physician to practice at hospitals and emergency-care clinics and make house calls within the restricted area, and specifically provided that patients could still select the doctor as their physician.
However, even though Emerick succeeded in having the court substantially rewrite the noncompete, he still lost because his new office was within the revised noncompete zone. The court ordered Emerick to pay the medical group’s attorney fees, which amounted to over $200,000.
While the group “won” under the old law, under the new law it’s possible the result would have reversed, with the group instead paying Emerick’s attorneys’ fees and damages because the court revised the agreement. It’s not unreasonable to think the new law might tempt physicians to proactively challenge overly broad noncompetition restrictions with a threat of holding the employer liable for damages, plus attorney fees and costs.
Beyond the damage and attorney fee provision of the new law, it imposes other significant restrictions:
- Noncompetition covenants are prohibited for all (a) employees whose box one W-2 earnings for the prior year of employment from the enforcing employer were less than $100,000 and (b) independent contractors paid less than $250,000 per year. These thresholds will be adjusted annually for inflation and grossed up for partial years of employment.
- Any noncompetition covenant with an employee that lasts longer than 18 months is unenforceable unless the employer can prove otherwise through “clear and convincing” evidence.
- In order to enforce a noncompetition agreement against an employee who is let go as a result of a “layoff” (an undefined term), the employer must pay the employee his or her base salary during the period of enforcement (offset by compensation the employee makes from subsequent employment).
- Employers must disclose the terms of the noncompete restrictions to employees in writing no later than the time the person accepts an offer of employment (and not on the employee’s first day of work). If the agreement becomes enforceable only at a later date due to changes in the employee’s pay, the employer must inform employees of that possibility.
- A noncompetition covenant does not include (a) a nonsolicitation agreement (defined narrowly by the statute); (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 (which might not include ordinary agreements among owners); or (e) certain covenants entered into by franchisees.
- Out-of-state forum selection provisions will not be enforced against Washington-based employees or independent contractors.