Non-compete agreements, also known as covenants not to compete or restrictive covenants, are a common business tool in employment agreements and in contracts for the sale of businesses.
The general purpose of non-compete agreements is to restrict the ability of employees, who sign the agreement, to go into business against the employer within a certain geographic area for a defined period of time.
If a prospective employee, or current employee signs a non-compete, usually the individual is agreeing that he/she will not compete with the employer by engaging in any business of a similar nature, as an employee, independent contractor, owner, part owner, significant investor, and whatever other form of competition the agreement identifies.
Generally, non-compete agreements are enforceable in Washington as long as the agreement is reasonable in:
(1) Length of non-compete (usually no more than up to three (3) years)
(2) Geographical restrictions (typically within employer’s service area)
(3) Type of activity (same or substantially similar work as performed by employee)
Typically, non-compete agreements are entered into when an individual is hired. However, sometimes an existing employer asks an employee to sign a non-compete after the initial hire date. This approach requires extra analysis.
In 2004, the Washington Supreme Court held, in Labriola v. Pollard Group Inc., that if a covenant not to compete is executed after the start of employment, to be valid, the covenant requires additional stated consideration.
Pollard Group, Inc. (“Pollard”) hired Labriola in 1997. Five years later, Labriola executed a non-compete limiting his ability to compete with Pollard for three years within 75 miles of Pollard’s business. Labriola remained an at-will employee and Pollard did not provide Labriola with any other benefits other than continued employment.
Later, Pollard terminated Labriola after learning that he intended to seek employment with a competitor. Pollard sent a letter to the competitor informing it of Labriola’s non-compete agreement.
In addressing the validity of the non-compete, the court framed the issue as whether there consideration for the formation of a contract when an existing employee executes a non-compete agreement, but receives no new benefit and the employer incurs no further obligations.
Labriola contended the non-compete agreement lacked consideration. Pollard argued the agreement was enforceable because future and continued employment and/or job training served as adequate consideration.
The court held the non-compete unenforceable for several reasons. First, Labriola executed it after starting work. Second, the terms of the non-compete did not promise future employment, wages or extra benefits. Third, Pollard promised Labriola no additional duties or obligations. Fourth, Labriola remained an “at will” employee. Finally, the court determined that, since the training Labriola received after signing the agreement was not different than it would have been had he not signed the agreement, it was not consideration for his promise not to compete.
Recently, Division II of the State Court of Appeals in McKasson v. Academy of Brian Johnson LLC., reinforced the need for new consideration to bind an existing employee to a non-compete agreement.
The Academy of Brian Johnson, LLC (“Johnson”) was a fitness business. McKasson had worked as an at-will employee for approximately five (5) years. Because Johnson was considering eventually transferring the Academy’s ownership to McKasson, they agreed on a transfer plan. Johnson and McKasson signed a written employment contract, drafted and presented by Johnson. However, the employment contract did not mention any such plan to transfer ownership of the business to McKasson; nor did it provide any change in McKasson’s employment other than adding a non-compete restriction stating that after termination of his employment, McKasson could not compete with Johnson for three (3) years.
Brian never transferred the Academy to McKasson. Instead, Johnson fired McKasson in 2011.
McKasson sued Johnson for damages and sought a restraining order prohibiting Johnson from enforcing the non-compete clause and asking the court to rule that the non-compete restriction was unenforceable.
McKasson argued that the non-compete was unenforceable because: (1) Washington case law holds that continuing employment is not consideration for a non-compete restriction after employment has begun; and (2) the employment contract explicitly stated that the Academy did not give McKasson any additional consideration for entering into the non-compete.
The court agreed with McKasson and held that the valid incorporation of a non-compete clause for an existing employee requires the employer give the employee extra consideration in exchange for the non-compete.
The messages from these cases are clear. If an employer asks an existing employee to sign a non-compete, the non-compete should be supported by consideration and the non-compete agreement recite the additional and independent consideration supporting the non-compete obligation; e.g. an increase in pay, a one-time bonus, improved fringe benefits, additional training, enhanced job security, etc.
All businesses should review existing non-competes signed during employment. If such post-hire non-competes either do not recite consideration or recite continued employment as consideration, the employer could prepare new non-competes for signature by existing employees.
These materials are not intended, and should not be used, as legal advice. Specific legal problems have specific factual situations and require specific solutions, none of which are provided by these materials. Anyone reading or otherwise using these materials should not rely on them as a substitute for legal advice.
Gil Sparks is Of-Counsel for Ogden Murphy Wallace, and has over 24 years representing employers on employment and labor law matters. Additionally, he has over 16 years senior human resources experience and is certified as a Senior Professional in Human Resources. He can be contacted at (509) 662-1954; or by email at firstname.lastname@example.org.