Washington’s New Noncompete Law Shrinks Physician Employment Agreements

This year the state of Washington flipped the regulations for noncompete agreements on their head, and eight months after the new law became effective the impacts are beginning to take shape. Some of your clients might be asking how the new law effects noncompetes in physician employment agreements. You’re in luck; I regularly draft and review those agreements.

In short, the new law provides that:

• If a court “reforms, rewrites, modifies, or only partially enforces any noncompetition covenant,” the employer must pay the employee’s damages (with a minimum damage amount of $5,000) plus attorney fees, costs, and expenses. For example, courts often modify geographic or other restrictions (such as reducing a geographic radius from 30 miles to 20 miles), which would now result in an award for the employee;
• If an employee’s noncompetition covenant lasts longer than 18 months, it is unenforceable unless the employer can prove otherwise through “clear and convincing” evidence;
• Noncompetition covenants are prohibited for workers unless their earnings exceed a certain threshold (about $100,000 for employees and $250,000 for independent contractors), which is adjusted annually;
• In the event of a “layoff” (an undefined term), an employee’s noncompetition covenant is unenforceable unless the employer continues to pay the employee’s 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;
• 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; or (e) certain covenants entered into by franchisees.
• For more details, see my last article, which was published before the new law became effective on Jan. 1, 2020.

Previously, employers faced little in the way of cost or risk from imposing overly broad noncompetes. With the new law in effect and the threat of attorney fees and damages, the potential cost for imposing an overly broad noncompete has increased. As a result, many employers have reduced the geographic scope of their noncompetition covenants (and in some cases, completely eliminated them).

I used to see the same noncompete applied uniformly across an entire organization, but now I frequently see specialties where a noncompete serves little purpose have been carved out. For example, a hospitalist, anesthesiologist, or emergency medicine physician may have little in the way of referral sources or ongoing patient relationships, and thus employers are rethinking whether the risk of imposing a potentially overly broad noncompete is worth the benefit.

Additionally, rural employers have an added risk that their noncompetes may be viewed as overly broad given the strong public interest of keeping physicians in traditionally underserved communities. Given the increased risk, I have seen some rural employers loosen the noncompete restrictions on physicians.

Similarly, almost all employers have shrunk the timeframe for their noncompetes from two or more years to 18 months or less. As noted above, a restriction in excess of 18 months is presumed unenforceable, which hands significant leverage to an employee wanting to avoid a noncompete.

A number of employers have changed their employment agreements by adding language that they are unenforceable if the employee fails to meet the earnings threshold. Employment agreements now frequently recite that the employer disclosed the noncompetition covenant to the employee at the time of the offer of employment. (Of course, this recital is only effective if such disclosure actually occurred.)

Employers often specify that the noncompete is unenforceable in the event of a layoff unless the employer affirmatively elects to enforce the covenant by continuing to pay the employee’s base wage. This removes a potential ambiguity in the event of a layoff.

Finally, although I have not seen it yet in a physician employment agreement, some dental offices, unwilling to risk expansive geographic restrictions, are allowing former dentists to service patients of the dental office in return for paying the dental office a fee; i.e., the former dentist is effectively purchasing the patient. This type of arrangement likely is a noncompetition covenant and should still comply with the new law, i.e., limited to 18 months, etc. It will be interesting to see how courts react to the restrictions and if this arrangement migrates to physician employment agreements.

The statute regulating noncompetes has had significant effects on physician employment agreements and these changes are expected to continue, particularly as the law around the new statute develops.