Noncompetition covenants have been used and litigated for 500 years. Yet the lawyer giving noncompetition advice to a client subject to Washington substantive law has remarkably little published authority to utilize.
The lack of published authority reflects the way the real world of restrictive covenants frequently operates:
An ex-employer threatens a new employer with a tortious interference claim because the ex-employee signed a restrictive covenant. The new employer chooses to terminate the employee, rather than face litigation.
An ex-employee, threatened with litigation, agrees to lesser restrictions to avoid a lawsuit and persuades the new employer to employ him/her despite the restrictions.
The court enjoins the ex-employee, leading to a negotiated resolution involving restrictions on the ex-employee (such as an agreement to not accept business from identified clients).
The court denies the ex-employer’s motion for injunctive relief, leading to a prompt negotiated resolution (including the payment of attorney fees to the defendant for wrongful restraint).
The most recent Washington Supreme Court decision, Labriola v. Pollard Group,1 didn’t effect any change. Rather, the court affirmed a principle enunciated 70 years earlier in Schneller v. Hayes: a midstream restrictive covenant, unsupported by new consideration, is unenforceable.2
The unanimous decision includes a concurring opinion that would have applied another established principle. Justice Madsen opined that a noncompetition covenant (as opposed to some lesser restraint, such as a nonsolicitation covenant) for a salesperson in the commercial printing industry was overly broad. Justice Madsen would have granted the declaratory judgment sought by the ex-employee and held the covenant to be “much more restrictive than reasonably necessary to protect [the ex-employer’s] legitimate business interests.”3
If the majority had signed the concurring opinion, it wouldn’t have been a change; the Washington Supreme Court reached the same conclusion almost 100 years ago in Columbia College of Music & School of Dramatic Art v. Tunberg.4 In that case, a piano teacher’s covenant promised that he would not teach in the City of Seattle. The Supreme Court refused to enforce the noncompetition covenant, but given the teacher’s competitive misconduct, instructed the Superior Court to prohibit solicitation of the school’s pupils: “[A]n injunction should issue restraining him from invading the good will of appellant’s business, and from soliciting its clients and patrons.”5
The only recent novelty in Washington’s noncompetition legal landscape was a limited legislative amendment protecting broadcast industry employees from enforcement of their noncompetition covenants if they were subjected to a reduction in force or terminated without cause.6 The 2005 amendment, however, doesn’t apply to salespeople or management.7
The Oregon legislature, by way of contrast, recently passed a dramatic statute. Oregon’s new law, effective on January 1, 2008, mixes traditional concepts with new approaches. It embraces the common law by requiring an employer to have a “protectable interest” justifying a noncompetition covenant.
The statute focuses on information as the interest the law will protect:
An employer has a protectable interest when the employee: (A) Has access to trade secrets, as that term is defined in ORS 646.461; (B) Has access to competitively sensitive confidential business or professional information that otherwise would not qualify as a trade secret, including product development plans, product launch plans, marketing strategy or sales plans; or (C) Is employed as an on-air talent by an employer in the business of broadcasting . . . .8
The Oregon law breaks new ground by requiring employers to notify new employees two weeks in advance of employment that the employer requires a noncompetition covenant as a condition of employment.9 Oregon courts also are instructed to not enforce noncompetition covenants unless the affected employee’s annual gross salary exceeds the median family income for a four-person family as determined by the United States Census Bureau.10 Noncompetition covenants are enforceable only against salaried administrative, executive or professional employees who exercise discretion and perform predominantly intellectual, managerial or creative tasks.11 And covenants can last no longer than two years.12
Under Washington law, a restrictive covenant is enforceable to the extent necessary to protect the ex-employer’s business or goodwill.13 But as the economy changes, so does the nature and extent of protection necessary to protect an employer’s business.
Earthweb, Inc. v. Schlack, a New York federal district court decision, examined the protection necessary for a business that provided products and services to business professionals in the information technology industry over the Internet.14 The court found that the new employer was “an embryonic business entity that will compete in a nascent industry which is evolving and re-inventing itself with breathtaking speed.”15 Thus, a 12-month restrictive covenant was too long.
Undoubtedly, the length of a covenant justified by an ex-employee’s knowledge of competitive information is limited by the shelf life of the information. To give a practical example, assume that an ex-employee is thought to be able to unfairly compete because she knows the prices charged by her ex-employer. If the prices change frequently because they reflect sensitive material costs, a covenant prohibiting all competition for three years would be impossible to justify.
But Washington lacks noncompetition case law that explores the appropriate approach for a superior court to undertake when evaluating a covenant justified on grounds that the employee has information that would allow him/her to unfairly compete.16 There are several Washington cases that apply the “customer hold” theory of protectable interest. Under this theory, if the nature of the employment brings the employee in personal contact with the employer’s customers, enabling the ex-employee to “gain an unfair advantage” because of the customer relationship, equity will interfere on behalf of the ex-employer.17
From somewhat dated Washington cases, we can infer the following: An accountant providing specialized retirement planning services to a small number of clients, many of whom followed her to her new business, had a sufficient hold over the customers she served to justify enforcement of a covenant to not accept business from those customers.18
A ferrier who was taught the art of horseshoeing by his employer through an apprenticeship, who was the only contact for his employer with customers needing horseshoeing services, and in whom the customers had great confidence, had a sufficient hold over the customers he served to justify a restriction on his competitive activities.19
An insurance salesperson had a sufficient hold over clients he served to justify a nonsolicitation covenant, but only applicable to clients of the office in which he worked.20 In that case, both the superior court and appellate court found a noncompetition covenant to be broader than necessary to protect the ex-employer’s business.
Still, Washington’s cases leave fundamental questions about the appropriate scope of the customer hold theory of protectable interest unresolved. How should courts apply the theory if the departed employee had limited contact with the customers or was one of several team members servicing clients? How should the theory apply to competition for the ex-employer’s prospective customers? Can a covenant be enforced if it prohibits an ex-employee from soliciting customers known to the ex-employee before being employed by the ex-employer? Can a covenant based on a customer hold theory be enforced if time has passed and not a single client has followed the ex-employee (in other words, empiric evidence demonstrates the absence of a hold over customers)?
The law of restrictive covenants inevitably involves public policy. Courts must measure the degree of protection needed by ex-employers against unfair competition.
But as Justice Rosellini noted (in dissent), “an employer is ‘not entitled’ to freedom from all competition per se.”21 Thus, “it is the function of the law to maintain a reasonable balance, and this requires us to recognize that there is such a thing as unfair competition by an ex-employee as well as unreasonable oppression by an employer.”22 Washington noncompetition law needs new appellate cases and legislative action to determine which longstanding principles still apply in today’s economy and which should be abandoned as a vestige of apprenticeship, a tool of unfair oppression or simply unnecessary in light of new economic realities.
Lawrence R. Cock is a partner at Cable, Langenbach, Kinerk & Bauer, LLP. At the time this article is published, he is representing clients in litigation involving restrictive covenants.
1 152 Wn.2d 828, 100 P.3d 791 (2004).
2 176 Wash. 115, 188, 28 P.2d 273 (1934) (covenant signed 23 days after commencement of employment is unenforceable). Cf. Northwest Mobile Services, LLC v. Schryver Medical Sales & Marketing, Inc., 2006 WL 1799620 (W.D. Wash. 2006) (holding that covenant signed “within a week of the date” employee commenced employment was supported by consideration).
3 152 Wn.2d at 847–48.
4 64 Wash. 19, 116 P. 280 (1911).
5 64 Wash. at 24. Although the court recognized that not a single pupil had left Columbia College of Music, it found that the teacher’s solicitations disclosed “an ill will, as well as an endeavor to influence the minds of certain of the pupils against appellant and its officers.” Id. at 22–23.
6 RCW § 49.44.190(1).
7 RCW § 49.44.190(4)(a).
8 ORS § 653.295(1)(c).
9 ORS § 653.295(1)(a)(A).
10 I reviewed a 78-page report by the U.S. Census Bureau titled “Income, Poverty, and Health Insurance Coverage in the United States, 2006.” It does not identify the four-person family median family income. For all families (four-person or otherwise), the “real median household income” for 2006 was $48,201.
11 ORS § 653.295(1)(b) and ORS § 653.020(3). But see ORS § 653.295(6).
12 ORS § 653.295(2).
13 Sheppard v. Blackstock Lumber Co., 85 Wn.2d 929, 932–33, 540 P.2d 1373 (1975).
14 71 F. Supp. 2d 299 (S.D.N.Y. 1999).
15 Id. at 306.
16 A quotation in Perry v. Moran from a 1960 law review gives some guidance: “The essential purpose of the post-employment restraint ... is not to prevent the competitive use of the unique personal qualities of the employee — either during or after the employment — but to prevent competitive use, for a time, of information or relationships which pertain peculiarly to the employer and which the employee acquired in the course of the employment.” 109 Wn.2d 691, 702 (1987) (quoting Blake, Employee Agreements Not To Compete, 73 Harv. L. Rev. 625, 647 (1960)).
17 Racine v. Bender, 141 Wash. 606, 612, 252 P. 115 (1927) (quoting 9 A.L.R. 1467, 1468).
18 Perry v. Moran, 109 Wn.2d 691, 748 P.2d 224 (1987).
19 Wood v. May, 73 Wn.2d 307, 310, 438 P.2d 587 (1968). Yet, the Supreme Court did not decide what restriction was appropriate, remanding to the superior court, which had previously refused to impose any restriction whatsoever.
20 Alexander & Alexander, Inc. v. Wohlman, 19 Wn. App. 670, 687, 578 P.2d 530 (1978).
21 Wood v. May, 73 Wn.2d at 319 (Rosellini, J., dissenting).
22 6A A. Corbin, Corbin on Contracts § 1394 at 89.
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