In order to protect your startup’s confidential information and intellectual property, it is generally advisable to have all employees execute an employee nondisclosure and intellectual property rights assignment agreement before commencement of their service. When these agreements contain post-employment non-solicitation and non-competition provisions, potential employees (and their counsel) often question whether or not such non-solicitation and non-competition provisions are enforceable. For non-solicitation provisions, the answer is that they are generally enforceable if limited to the customers, prospects and employees of the company at the time such employee terminated his or her service with the company. Unfortunately, however, the answer is not as clear with respect to non-competes. Below is a brief overview of factors to consider when evaluating the enforceability of non-competition provisions, as well as specific details regarding the enforceability of non-competes in Washington and other states.
Generally
The common test regarding the enforceability of a non-compete is whether the provision is (i) reasonable with respect to type of business, geographic scope and length of time, and (ii) necessary to protect a legitimate business interest. It is important to note that each state has its own set of rules regarding the enforceability of non-competition restrictions and that the application of such individual state rules will be heavily dependant upon the specific facts and circumstances of each situation. Moreover (and despite what the choice of law provision in the contract might say), the enforcement of non-competes can often be subject to the local laws of the jurisdiction where the employee resides. Accordingly, it is important to understand the limitations on enforceability of non-competes in both the state where your startup is located and the state(s) where your employees live and work.
In Washington State
In Washington, courts have generally found non-competition restrictions to be enforceable if (i) reasonable in scope (line of business and geography) and duration, and (ii) necessary to protect a legitimate business interest. It is important to note that Washington courts have found that non-compete restrictions must be supported by independent consideration. An offer of new employment is valid consideration for an enforceable non-compete agreement when an at-will employee is first hired; however, after the at-will relationship begins, new, independent consideration is needed to create a valid covenant restricting competition.
Other States
Non-competes are generally also enforceable (subject to variations of the above common test) in all states other than:
- California: Pursuant to California statute, non-competes are void as unlawful except for limited circumstances in connection with (i) the sale of a business or (ii) certain partnership matters. California courts have also determined that non-solicitation restrictions are also void as unlawful except where their enforcement is necessary to protect trade secrets.
- Colorado: Non-competes are generally only enforceable (i) in connection with the sale of a business or (ii) with respect to executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. Colorado courts have also placed heavy limitations on the enforceability of non-solicitation restrictions.
- Louisiana: Non-competes are only permitted in certain statutorily enumerated circumstances.
- Montana: Non-competes are generally only enforceable in connection with (i) the sale of a business or (ii) the dissolution of a partnership.
- North Dakota: Non-competes are generally only enforceable in connection with (i) the sale of a business or (ii) the dissolution of a partnership.
- Oklahoma: Non-competes are generally only enforceable in connection with (i) the sale of a business or (ii) the dissolution of a partnership. Oklahoma also has heavy limitations on the enforceability of non-solicitation restrictions.
- Oregon: Non-competes are only permitted in certain statutorily enumerated circumstances, and are void unless in strict compliance with statutory requirements.
Note that many states also have specific limitations on the enforceability of non-competes for certain professions or industries such as physicians, attorneys and the broadcast industry.