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Washington Voids Most Non-Compete Agreements

Posted on Date: May 28, 2019

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Last week, Jay Inslee, the Washington state governor, signed House Bill 1450 which voids most non-compete agreements in Washington state. The law also prohibits francihisors from enforcing non-solicitation clauses. Here is a quick summary of what the law does and does not do, how it may be challenged in the courts, and how it will affect franchisees operating in Washington state or with Washington state based employees.

What the Law Does

The new law voids any written or oral agreement that prevents an employee or independent contractor from engaging in any lawful profession, business, or trade. It prohibits employers from restricting employees making less than twice the minimum wage from working second jobs in the same industry. The new law does not apply to non-compete agreements between employers and employees who make more than $100,000 or independent contractors making more than $250,000 provided that the non-compete agreement is clearly disclosed and that the length of the non-compete agreement is “reasonable” (generally 18 months or less).

The new law also prohibits franchisors from enforcing non-solicitation clauses in the franchise agreements. Specifically, the law states that franchisors may not “restrict, refrain, or prohibit” franchisees from soliciting or hiring any employee of the franchisor or another franchisee.” But, other than franchisor and franchise agreements, the law explicitly authorizes the continued use of non-solicitation clauses. Non-solicitation clauses are written or oral agreements that prohibit a former employee from encouraging other employees or customers to leave or cease or reduce doing business with the former employer.

The law will take effect on January 1, 2020 and will apply retroactively. This means that as of January 1, 2020 most non-compete agreements for employees or independent contractors and all non-solicitation agreements controlled by franchisors are unenforceable, even if the agreement was made years before the law became law.

What the Law Does Not Do

The new law does not prohibit non-compete agreements between franchisees and franchisors—Generally, under Washington law, franchisees are not the employees or independent contractors of the franchisor. Some janitorial franchises may be exceptions to this rule. If your franchise agreement identifies you, individually, as a franchisee (not a business entity such as a corporation or an LLC), then you are still bound by any non-compete clause in your franchise agreement. If only the franchisee’s business entity signed the franchise agreement and the individual who controlled the franchisee’s business entity was an employee of the franchisee’s business entity, a clever attorney could argue that the non-compete only applied to the franchisee’s business entity not the individual employee. This would be a high risk argument and any legal case based on it would like have a lengthy (and expensive) appeals process.

Example:Jane Smith bought a real estate franchise from the franchisor Beta-Max in 2017. She signed a franchise agreement with a non-compete agreement that if her franchise was terminated she would not work in the real estate industry within 50 miles of a Beta-Max franchisee for two years after termination. Her franchise agreement also requires her to have all her employees sign non-competes that say they will not work for other real estate companies while they are employed with her and for two years after their employment with her ends.

As of January 1, 2020, Jane cannot not enforce the non-compete agreement against any of her employees while they worked for her if the employee made less than twice the minimum wage or against her former employees if they made less than $100,000 (employee) or $250,000 (independent contractors). Beta-Max, however, can still enforce the non-compete agreement it has with Jane.

Bottom line:Non-compete agreements between franchisees and their employees are void; Non-compete agreements between franchisees and franchisors are enforceable.

The new law does not prohibit non-solicitation agreements between franchisees and their employees—The law only prohibits franchisors from restricting franchisees from soliciting or hiring employees of the franchisor or another franchisee in the same system. It does not prohibit franchisees from restricting their employees or independent contractors who have left the franchisee’s company from encouraging current employees or customers to leave or stop doing business with the franchisee’s company.

Example:Jane’s franchise agreement with Beta-Max prohibits her from attempting to hire employees or soliciting customers from other Beta-Max franchisees and states that doing so could be the basis for termination. Bob Franco, a Beta-Max-franchisee on the other side of town just hired Jane’s best broker, Sarah Shah, and Sarah is trying to convince Jane’s other employees and customers away.

Under the new law, Beta-Max can’t default or terminate Bob for poaching Jane’s employees. Jane can’t sue Bob for violating his franchise agreement either. However, the new law does not prohibit franchisees from enforcing non-solicitation agreements with employees. If Jane had a non-solicitation agreement with Sarah, she could ask a court to enforce it.

Bottom Line: Franchisor cannot restrict or require their franchisees to restrict franchisees from “poaching” employees from each other, but franchisees can restrict their current and former employees from “poaching” the franchisee’s employees or attempting to divert the franchisee’s customers.

Trade secrets and proprietary information are still protected—The law voids non-compete clauses, but agreements related to trade secrets and proprietary and confidential information are still enforceable. A franchisee’s employee can stop working for the franchisee and immediately go to work for a competing business, but they cannot take the operations manual and customer lists with them or open up a competing business that looks just like the franchised business.

Example: Jane learns that before Sarah left her business, she took Jane’s client database, marketing materials, and sales plans. Sarah stopped working for Bob and opened her own business using the customer list and the materials.

Under the new law, Jane could sue Sarah for violation the non-solicitation agreement and either Beta-Max or Jane could sue Sarah for stealing the customer list and proprietary materials.

Bottom Line: Agreements that protect trade secrets, trademarks, and proprietary information are still enforceable.

What’s Next

Franchisors or their trade organizations may challenge the constitutionality of the law because it applies retroactively. Washington courts give the legislature broad discretion and will probably uphold the new law.

The new law does not invalidate the entire franchise agreement. A court interpreting the new law would strike the sections of the franchise agreement that deal with non-competes for employees and non-solicitation of employees between franchisees but allow the remainder of the franchise agreement to remain in effect.

The law does not address how it applies to franchisees who are area developers or have other quasi-franchisor duties and obligations. Franchisees in those situation should contact a franchise attorney for specific clarification as to how the law might affect them.

Franchisees who have employment agreements between themselves and their employees should take a hard look at their agreements and make sure that they have protected themselves with broad non-solicitation clauses and clear definitions of confidential information. They should also take a close look at how they train their employees and where they store confidential information and make sure that they are sharing customer list, operations guidelines, and confidential information on a “need to know” basis.

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Caroline Fichter is an associate attorney with the Bundy Law Firm in Kirkland, Washington and focuses on contract, franchise, real estate, and tort law. Learn more at https://www.myfranchiselawyer.com/.

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