Washington’s Amended Non-Compete Law Creates New Considerations for Employers
Washington Governor Jay Inslee recently signed Senate Bill 5935 into law, amending and expanding Washington’s statute restricting the enforceability of noncompetition covenants (Revised Code of Washington 49.2). The amended statute, effective June 6, 2024 and enacted to “facilitat[e] workforce mobility and protect[] employees and independent contractors,” follows a growing trend among states restricting the enforceability of noncompetition covenants and creates additional considerations for employers entering into non-compete agreements with Washington-based employees.
The original statute prohibits an employer from entering into non-competition agreements with an employee unless, among other things, the minimum salary threshold and notice requirement are satisfied.
Among other changes, the new law broadens the definition of a “noncompetition covenant,” expands standing to bring a private right of action, clarifies notice requirements and tightens language around forum selection and choice of law. A more in-depth evaluation of each of these changes is below.
Broadened Definition of Noncompetition Covenant
One of the amended statute’s most significant changes is its broadened definition of “noncompetition covenant.”
The original statute defined a “noncompetition covenant” to include “every written or oral covenant . . . by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind” and excluded “[a] nonsolicitation agreement.”
The amended statute broadens the definition in two notable ways:
First, the amended statute expands the definition of noncompetition covenant to include “an agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer,” meaning a covenant that generally prohibits an employee from doing business with a customer (e.g., a non-service covenant) may be treated as a noncompetition covenant under Washington law.
Second, the new law narrows the definition of an excludable nonsolicitation agreement to any agreement between an employer and employee that prohibits the solicitation “(a) [o]f any employee of the employer . . . or (b) of any current customer of the employer.” The insertion of “current” means that a nonsolicitation agreement that prohibits the solicitation of past or prospective customers may now fall within the statute’s reach and its proscribed conduct.
Expanded Standing
The statute also confers standing upon a broader swath of Washington employees, providing another impediment to enforcement of noncompetes. The original statute provided that only a party to a noncompetition covenant may bring a cause of action.
Notably, the amended statute removes that party requirement and permits any “person (i.e. any individual or entity) aggrieved by a noncompetition agreement” to bring a cause of action. Under this amended framework, a prospective employer may potentially sue a prospective employee’s former employer to challenge a noncompetition covenant.
Expanded Retroactivity
The statute also broadens standing via expanded retroactive application. The law applies “to all proceedings commenced on or after January 1, 2020, regardless of when the cause of action arose.” The original statute did not provide a private right of action for employees who entered into a noncompetition covenant prior to January 1, 2020 unless an employer “enforced” the noncompetition covenant and effectively reset the clock.
However, the amended statute casts a wider net and expands standing for aggrieved employees who entered into noncompetition covenants prior to January 1, 2020 and whose employer “enforced or leveraged” the covenant.
Revised Notice Requirements
The amended statute also imposes more stringent notice requirements upon employers. To have an enforceable noncompetition covenant, the original statute required an employer to disclose the terms of a noncompetition covenant “in writing to a prospective employee no later than the time of the acceptance of the offer of employment.”
The amended statute expands an employer’s notice obligations, providing that written disclosure must be given “no later than the time of the initial oral or written acceptance of the offer of employment.” Practically, this means that an employer who orally extends an offer to a prospective employee – for example, by phone, videoconference or immediately following an in-person interview – must provide notice of the terms of any noncompetition covenant before that candidate orally accepts the offer.
Closed Forum Selection and Choice of Law
The amended statute also tightens the language around the jurisdiction of Washington courts and application of Washington law. The original statute provided that a noncompetition covenant was “void and unenforceable” if it required an employee or independent contractor to adjudicate the covenant outside of Washington state “and to the extent it deprived the employee . . . of the protections or benefits” of the law.
Notably, the new statute replaces “and” with “or,” eliminating the requirement that both adjudication outside the state and the deprivation of an employee’s rights under the law be satisfied to render a noncompetition covenant void and unenforceable. While neither the original nor amended statute explains what constitutes “the protections or benefits [of the law],” the law arguably contemplates those protections and benefits conferred under the statute.
Additionally, the amended statute provides that a noncompetition covenant is “void and unenforceable” if it “allows or requires the application of choice of law principles or the substantive law of any jurisdiction other than Washington state.”
Unsettled Questions
Despite the breadth of the statute’s amendments, there remains ambiguity and unsettled questions. While the statute historically, except for limits on the availability of the private right of action discussed above, “applies to all proceedings commenced on or after January 1, 2020, regardless of when the cause of action arose,” it remains unclear whether the statute has retroactive application – that is, whether an aggrieved party can seek to retroactively invalidate noncompetition covenants that failed to comply with the statute at the time of their execution. Unfortunately, the amended statute provides little explicit guidance on this front, but its directive to liberally construe the law’s protections provides an argument for retroactive application.
The amended statute also does not specify, and it remains unsettled, whether the amendments apply retroactively “to all proceedings commenced on or after January 1, 2020,” as provided in the statute, or only to agreements entered into on or after June 6, 2024. These ambiguities likely will be the subject of litigation.
Key Takeaways for Employers
These new additions to Washington’s noncompetition statute reinforce the care employers must exercise in drafting narrowly tailored restrictive covenant agreements and properly disclosing the terms of such agreements to prospective employees.
