In reaction to court cases that, in the eyes of lawmakers, interpreted the statute too narrowly, Washington’s Legislature passed a bill this year, SB 5935, to expand the application of the noncompetition statute.
As background, prior to amendment, the 2020 law (Chapter 49.62 RCW on Noncompetition Covenants) provides that:
- A noncompetition covenant does not include: (a) a nonsolicitation agreement (a term defined in 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.
- An aggrieved party only has a cause of action under the law for a noncompetition covenant entered into prior to Jan. 1, 2020, if the noncompetition covenant is being “enforced.”
- Employers must disclose the terms of the noncompetition covenant to an employee in writing no later than the time the employee accepts an offer of employment.
- Noncompetition covenants are prohibited for workers unless their earnings exceed a certain threshold (as of 2024, about $120,000 for employees and $300,000 for independent contractors, according to the Washington State Department of Labor & Industries), which is adjusted annually for inflation.
- 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.
- 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).
- 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.
The amendments effective June 6, 2024, make the following material changes:
- The first section of the statute now specifically tells courts that the provisions protecting workers need to be “liberally construed” and its exceptions “narrowly construed.”
- A regulated noncompetition covenant now includes “an agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer.” Further, the definition of a nonsolicitation agreement as it relates to customers was narrowed to only agreements that prohibit solicitation of “any current customer of the employer.” These changes likely are in reaction to a court case that treated a broad nonsolicitation clause as a nonsolicitation agreement not subject to regulation under the act. See Wellspring Family Servs. v. Owen, 19 Wn. App. 2d 1030 (2021) (holding that a provision that prohibited providing services to current and former clients constituted a nonsolicitation agreement and not a noncompetition covenant).
- The amendment voids contract provisions that attempt to apply another state’s law to a Washington based worker. Again, this likely is in reaction to recent court cases. See CVS Pharmacy Inc. v. Brown, C21-306 MJP, 2021 WL 977697, at *4 (W.D. Wash. Mar. 16, 2021) (applying Rhode Island law to a noncompete involving a Washington resident).
- The statute previously provided that an action could only be brought relating to a noncompetition covenant signed prior to Jan. 1, 2020, if the noncompetition covenant was being “enforced,” but the amendment now provides that an action also may be brought if the noncompetition covenant is being “explicitly leveraged.” This likely is in reaction to a court deciding that an employer telling a former employee that she remained bound by her noncompetition agreement did not rise to “enforcement” of the noncompete, even though the ex-employee believed the former employer would enforce it. Consequently, the ex-employee could not sue the former employer under the act. See Sowa v. Ring & Pinion Serv. Inc., 221CV00459RAJBAT, 2021 WL 6334930, at *4 (W.D. Wash. Sept. 9, 2021).
- The amendment removes language that suggested a void noncompetition covenant is only unenforceable against the employee. Further, it clarifies that an aggrieved party seeking relief under the statute does not have to be a party to the noncompetition covenant. Both changes suggest that future employers may have the ability to sue former employers of their employees under the statute.
- The noncompetition covenant exception related to the purchase or sale of a business, now applies “only if the person signing the covenant purchases, sells, acquires, or disposes of an interest representing one percent or more of the business.”
- The language specifying that the covenant must be disclosed no later than the time the employee accepts an offer of employment, now states this is the “initial” acceptance and may happen orally or in writing.
The Legislature has sent a clear signal to courts that it intends a more liberal construction of the statute regulating noncompetition covenants and protecting employees. Both employers and employees should review their current agreements to analyze how the amendments may affect existing agreements.
Note: After the Washington State Legislature passed the amendment discussed in this article, the Federal Trade Commission proposed a final rule that would prohibit most noncompete agreements between employers and workers, which applies in addition to Washington law. The rule is scheduled to be effective 120 days after it is published. However, the rule is expected to be challenged in the meantime and its implementation may be delayed.
