by Samuel K. Darling, Business Lawyer at Genesis Law Firm
Want to open a business that competes with your employer or former employer? This article explains what you can and cannot do under Washington State law. Though the information is not exhaustive, it might be the most comprehensive freely available article of its kind. It contains five sections: I) competing just before leaving your employer, II) non-compete agreements, III) using your old employer’s customer list, IV) other types of protected information, and V) hiring former coworkers. Aside from the second section (on non-compete agreements), every section of the article applies to everyone who intends to open a competing business, even if you had no written contract with the business you intend to compete against.
I. Can I Compete with My Employer After Giving My Two-Week Notice or After I Receive a Termination Notice? Employees owe their employers an “implied duty of loyalty”. This duty of loyalty prohibits you from competing against your current employer during the entire period of employment, including the last two weeks. Even if the duty is not stated in a written employment contract, it nonetheless exists. That means you cannot run a competing business, regardless whether it is at work or during your time off. You might be relieved of the duty of loyalty if your employer materially breaches your employment contract, such as by failing to pay your wages. This is arguable, and it would be safer to terminate the employment prior to competing.
You can “prepare” to compete with your employer before your last day, so long as you do so off the clock and do not “hinder” your current company. Allowed preparations include making plans to open your competing business, meeting with an attorney, discussing the business with your potential business partners, and otherwise laying the ground work for your new endeavor. A word of warning: soliciting customers for your competing business, especially your current employer’s customers, is usually prohibited.
Your duty of loyalty does not prevent you from working all types of jobs during your employment, just ones that compete with your current employer. If you need to make additional money for the business you intend to open, you can typically work a simultaneous position in another field so long as your employer has not banned moonlighting. In fact, legislation taking effect in 2020 allows you to work a second job in another field regardless whether your employer bans it. This legislation applies if your employer pays you less than twice minimum wage. In other words, your employer needs to pay you at least twice minimum wage to gain the exclusive rights to your time. There are a few exceptions to your right to work a second job in another field. The first is that your employer can validly ban moonlighting for safety reasons. For example, if you work back-to-back 14-hour shifts operating heavy equipment, your employer might be able to ban you from working a job that would interfere with your sleep between shifts. Otherwise you could seriously hurt yourself or someone around you.
Similarly, regardless your pay, your employer can ban you from working a second job if the second position would interfere with scheduling expectations. This is common sense: you do not have the right to take another job that if the shifts are likely to overlap.
After your employment, you can generally work any job you want, including one that competes with your former employer, subject to a few caveats. Read below for more on this.
II. Can I Compete With My Former Employer if I Signed a Non-Compete Agreement? In many cases non-compete agreements prevent competition with an employer even after job separation. If you signed a contract containing a provision of this type, you should assume it is enforceable unless one of the following exceptions applies:
1. No “Consideration”. A non-compete provision is a contract (or a portion of a contract) and, like any contract, requires “consideration” to be enforceable. That is, your employer needs to give you something in return for your agreement not to compete. Unless the employer gives consideration – something in return – the contract becomes unenforceable.
Surprisingly often, non-compete agreements become unenforceable precisely because the employer failed to give anything in return. This defense against enforcement often hinges upon when the parties entered the non-compete agreement. If the employer presented you with the non-compete agreement when you began the job, the job itself was adequate consideration for all the things you agreed to do in return, including your agreement not to compete. But if the employer asked you to sign the non-compete agreement AFTER beginning the job, the employer would need to give or promise you something more in return for the non-compete agreement, such as a promotion, bonus, a pay raise, or access to protected information.
A law taking effect in 2020 provides additional clarity regarding the timing of consideration. If the job itself is the employer’s consideration – what the employer gives in return for the agreement not to compete – the employer must present the non-compete agreement by or before the employee accepts the position. The employer cannot wait and surprise the new employee with a non-compete agreement during the several weeks that often transpire between the time the employee accepts the position and the employee’s first day. This new law is for good reason. If the employer presents a non-compete on the employee’s first day of work (as opposed to when the employee accepted the position), the employee would typically have no choice but to sign. The employee would have already acted in reliance upon the new job, such as by quitting an old job, turning down other job offers, and relocating.
Of course, businesses with legal counsel understand the consideration requirement and have a few tricks enabling employers to obtain non-compete agreements after the employee’s first day and without offering much in return. For example, your employer might ask you to sign a non-compete agreement as a “commitment to the team” in return for a traditional holiday bonus. In that instance, the holiday bonus would probably constitute sufficient consideration for the non-compete agreement, and the employer will have obtained the agreement without paying you more than you received in past years.
2. Unreasonable. A court or arbitrator can also render a non-compete agreement unenforceable because it is “unreasonably restrictive”. This argument tends to be unpredictable, because the judge or arbitrator typically has immense discretion when weighing all the relevant factors. Relevant factors include:
- The importance of the employee. The higher your position and pay, the more your employer can restrict you.
- The geographic scope of the restriction, such as 50 miles from the old employer’s location, the entire state, or the entire world. The smaller the restriction, the more reasonable it is.
- The time period of the restriction after job separation, such as two months, two years, or forever. Shorter restrictions are more reasonable.
- The employer’s legitimate concerns. For example, a small, local company doing business in a customary fashion would have little reason to restrict you from opening a similar business in a different state.
- The rate of change in the industry. Long periods of restriction may be unreasonable for industries with fast-paced change, such as computer technology.
- How these factors relate to each other. A long non-compete period might be acceptable if the geographic scope of the restriction is smaller, but not if the geographic restriction stretches further.
As of 2020, any non-compete agreement for greater than eighteen months after job separation is presumptively unreasonable, though the employer can attempt to rebut this presumption by showing exceptional circumstances.
Washington tests the reasonableness of non-compete agreements with a “blue pencil”. This means the judge or arbitrator can essentially re-write the scope of a non-compete agreement to make it less restrictive if the judge or arbitrator found the original language unreasonable. By making the non-compete less restrictive, it becomes reasonable and enforceable.
Traditionally this “blue pencil” approach gave employers motivation to draft highly restrictive non-compete language. Even if the court found the language unreasonable, the judge would simply take out his blue pencil and re-write the language as restrictively as the judge felt was allowable.
As of 2020, new legislation will probably change this. Beginning January 1, 2020, any blue-pencil re-writes of a non-compete provision will automatically render the employer liable for at least $5,000 in damages (or higher damages if the employee can prove them) plus the employee’s attorney fees and costs for any enforcement proceeding. Presumably employers will begin drafting much less restrictive non-competes to avoid these financial penalties.
This punishment for blue-pencil re-writes only applies to the employer, the person seeking to enforce the non-compete provision. If the case proceeds to court or arbitration, the employer has a significant risk of paying blue-pencil damages, whereas the employee does not. As a result, you might have leverage to re-negotiate with your former employer over a potentially unreasonable non-compete.
3. Material Breach. A non-compete agreement becomes unenforceable if the employer materially breached the parties’ employment contract. This makes sense: if one contracting party failed to do what he promised, the other party should be excused from performing on the contract as well. In one reported case, an employer who terminated an employee prior to an agreed date was not allowed to enforce the employee’s non-compete provision. Whether a judge or arbitrator will consider a breach “material” can be difficult to predict, so be wary of relying upon this argument.
4. Stricken by Chapter 49.62 RCW. Beginning in 2020, employers (or former employers) cannot enforce non-compete agreements in the following situations:
- If the old employer paid the employee less than $100,000 per year, adjusted for inflation annually.
- For an independent contractors, if the old employer paid less than $250,000 per year, adjusted for inflation annually.
- If the non-compete provision is between a performer and a performance venue (or someone scheduling the performance venue) and exceeds three calendar days.
- If the former employer laid off the employee (as opposed to firing the employee) and did not provide the employee compensation during the period of the non-compete. The required compensation is your base pay at the time of the layoff, minus whatever you earn from other employment during the period you are prohibited from competing.
If a judge or arbitrator voids a non-compete agreement for one of these reasons, the party seeking enforcement (the former employer) must pay the employee or independent contractor the greater of his or her actual damages or $5,000, plus reasonable attorney fees and costs.
Notably, as of this writing no court case has dealt with the constitutionality or interpretation of the statutory laws taking effect in 2020. The statutory provisions are likely to remain effective as written, but there is no guarantee of this.
III. Soliciting Old Customers. Chapter 19.108 RCW generally prohibits you from soliciting your old employer’s customers or list of potential customers. This is true even if your employment contract never addressed the topic, an outcome which might strike you as surprising and unfair. Customer lists are considering protected “trade secrets”. This is true whether you actually kept a written list of customers or you simply remember them, nor does it usually matter whether you or someone else within your old employer’s company had been the customers’ primary point of contact or initial point of contact.
There are numerous exceptions to the prohibition against soliciting your old employer’s customers:
- Reasonably Ascertainable Elsewhere. A customer list does not belong to your employer if it was readily ascertainable through other means, such as a phone book, a trade directory, your church directory, your relationships prior to working with your old employer, or your relationships after your employment. This does NOT mean you can contact all your employer’s old customers if their names are in a phone book. Your employer’s customer list is not simply a list of names; it is a list of QUALIFIED names – people who are likely to do business with someone in your chosen industry. It is the knowledge of which people are qualified in this respect that usually makes a customer list valuable. That means you can randomly call anyone in the phone book (assuming they are not on the national do-not call list), because your employer did not qualify the names on the list. But you cannot systematically look up and call a list comprised of your old boss’s customers, because the valuable portion of the list – who is qualified – came from your prior employment. Similarly, a list containing email addresses and other contract information is not protected to the extent the contact information is readily ascertainable from sources other than your prior employment. Information is not readily ascertainable if you have to resort to illegal measures to obtain it, such as computer hacking or bribery.
- Did Not Reasonably Protect. Your former employer cannot claim a customer list is a trade secret if the employer did not reasonably try to keep it secret. For example, a customer list presumably would not be protected to the extent your former employer listed valuable customers on the company website, disseminated the names to other companies in the industry, or mentioned the names to the public.
- General Solicitation. You are allowed to solicit the general public, such as by creating a website, publishing an ad in the newspaper, and sending fliers to everyone in your geographic vicinity. The customers who come to you from a general solicitation are yours, even if they previously worked with your prior employer.
- Customer Comes to You. Similarly, you are allowed to work with your employer’s past customers so long as you do not “solicit” them. This is a tricky and potentially dangerous area of the law hinging upon the definition of “solicit”. A note from a seminal case in Washington, Nowogroski Ins. Inc. v. Rucker, states “merely informing customers of one’s former employer of a change in employment, without more, is not solicitation”, an ambiguous explanation. If you want to make first contact with your old employer’s customers, such as the ones you worked with closely, it would be best to state you have left your prior company and not to mention your new business or desire to have an ongoing business relationship.
- No Damages. An employer seeking to prosecute a case for disclosure of trade secrets bears the burden of proving damages, meaning financial loss. If you solicit your former employer’s customers but the solicitation is unlikely to lead to any financial loss, your boss would have nothing to complain about. For example, soliciting business from former customers who sued your old boss might be safe, because the parties to a law suit are unlikely to do business with each other again. Likewise, it might be safe to solicit business from customers who became your best friends, because they probably would have followed you to your new business anyway.
IV. Other Trade Secrets. As with customer lists, you are not allowed to use your former employer’s “trade secrets” of any kind. A trade secret is essentially any information your former employer is in unique possession of, that is worth money to your former employer, and that your employer takes reasonable steps to keep secret from competitors. Common examples include special formulas, compilations, programs, devices, methods, techniques, or processes. The exceptions to trade secrets are the same as the above-written bullet-points for customer lists.
Trade secrets do not include “general knowledge, skills, and experience”. If numerous competitors in the industry use the information, you probably can too.
V. Hiring Former Co-Workers. The law generally forbids you from attempting to cause a third party to breach a business contract. This means you should not attempt to hire your former coworker if working for you would breach the coworker’s current contractual obligations with your former employer. Normally this is not a concern, because most employees are “at-will”. An at-will employee can quit at any time for any reason and join you in your new enterprise. Some of your former coworkers, however, might have contracts for a specified term, obligating them to continue working for your old company until a specified date or length of time. Or they might have non-compete contracts prohibiting them from working for a competitor for a length of time. If a former coworker falls into this category, it would be safest to hire him or her with the understanding he or she would not begin work for you until his or her pre-existing contractual obligations have expired or become unenforceable.
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