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Navigating Non-Competes: Exploring Recent Changes in Federal and State Law

On April 23, the Federal Trade Commission issued a final rule on non-competes, which goes into effect 120 days after the rule is published in the Federal Register. The new rule creates a nationwide prohibition on explicit non-compete clauses and any contract term that operates as a de facto non-compete, such as broad non-disclosure or non-solicitation clauses that prevent a worker from working in the same field or a clause that requires a worker to repay certain training costs if they quit within a specific time period. Existing non-competes for senior executives can still be enforced, and non-competes as part of a bona fide business sale are exempt. Senior executives are those employees in a policy-making position who received a total compensation of at least $151,164 in the preceding year. Although the FTC rule preempts all inconsistent state laws, opponents have already filed legal challenges, and the rule may never actually take effect. In the meantime, Washington employers should comply with Washington’s non-compete statutes, including recent changes to Chapter 49.62 RCW that go into effect on June 6, 2024.

Washington’s non-compete statutes generally prohibit non-competes for employees and independent contractors who don’t meet compensation thresholds and restrictions exceeding 18 months. The statutory revisions affect both non-competes and non-solicitation agreements (which are exempt from the scope of the statute):

  • Any agreement that “directly or indirectly prohibits the acceptance or transaction of business with a customer” is void and unenforceable. Since the law was enacted in 2020, many employers have used non-solicitation agreements restricting former employees from soliciting customers and doing any work for customers. For example, a 2021 case upheld a non-solicitation clause that prohibited former employees from “provid[ing] services in Outside Practice to any Client” of the employer. Wellspring Fam. Services v. Owen, 19 Wn. App. 2d 1030 (2021). This non-solicitation restriction would not be enforceable under the revisions taking effect in June.
  • The definition of a non-solicitation agreement has been narrowed to limit the restriction to soliciting “current” customers of the employer. This means that many current non-solicitation clauses that prohibit soliciting past and prospective customers will no longer be enforceable.

Fortunately, the changes do not impose liability for noncompliant agreements as long as the employer doesn’t try to enforce them. This means employers can rest assured that they are not immediately at risk for noncompliance. However, it’s important to note that an employer seeking to enforce a noncompliant agreement will be liable for the greater of the former employee’s actual damages or $5,000 plus attorney’s fees and costs, even if a court only partially enforces the non-compete. Courts are also directed under the new revisions to liberally interpret the law to facilitate worker mobility.

Given the recent changes in non-compete and non-solicitation agreements, employers must take proactive steps. This includes reviewing existing agreements for compliance with the new statutory revisions and being prepared to notify current and past employees of the new FTC rule if it goes into effect. Employers may also want to identify their “senior executives” and inventory the different employment arrangements that may contain non-competes, especially given how broad the new rule is. Our attorneys are ready to discuss options for employers seeking to protect their confidential information and customer base. By taking these steps, employers can ensure they are in compliance with the law and protect their business interests.


Disclaimer: This information is for general informational purposes only and does not constitute legal advice. Please consult with an attorney for specific legal guidance related to your situation.

 

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