Advisories & Insights

Noncompetition agreements can be used to deter employees from poaching customers or clients after an employee leaves a company.

These kind of agreements can take on a wide range of forms, but at their core, they ban an employee from soliciting work from or performing work for customers for an agreed-upon period of time and sometimes within a geographically defined area. Their purpose is not to prevent the competitive use of the unique skills of an employee, but rather to prevent competitive use of the employer's information or relationships which the employee acquired in the course of employment.

They are most needed where employees form close personal relationships with the customers such that there is a high risk that the customers will want to follow the employee to another employer if the employee is terminated or leaves for other reasons. Examples include physicians, accountants, insurance agents and sales professionals.

Because there are no Washington statutes prescribing what can or cannot be included in a noncompetition agreement, it is necessary to consult case law to establish what is permissible. Given the lack of specific guidelines, there are many Washington cases where the parties resorted to litigation to establish the contours of their agreements. Such lawsuits are usually contentious, there can be a high level of uncertainty as to the outcome, and resolving even simple disputes can easily generate tens of thousands of dollars of legal fees and other costs.

The general rule in Washington is that noncompetition agreements are valid if they are reasonable. The "reasonableness" of an agreement is probably the issue most litigated and where the most care needs to be taken in drafting the agreement. It involves the balancing of the interests of the employer, the employee and the public. Provisions which are too restrictive, as viewed from the perspective of the departing employee or the public, risk being struck down in whole or in part by the courts.

The key factors in determining reasonableness are the period of time during which the agreement is in force and the scope of the restrictions. Typically courts uphold agreements that are limited to one to three years in duration. Agreements as long as five years in duration have been both upheld and stricken down, depending upon the facts. With respect to the scope of the restriction, a determination needs to be made whether a breach will be triggered when a departing employee actually performs work for the employer's customers or whether it will be triggered merely by soliciting the employer's customers. While more limited in scope, a nonperformance agreement is easier to enforce because it is easy to establish whether a former employee is doing business with his or her former employer's customers.

A nonsolicitation agreement, on the other hand, places upon the employer the burden and the cost of proving that the employee enticed customers away from the employer. In many cases, the employer will have to bring customers into the litigation process as witnesses to establish whether solicitation occurred. That can result in damaging whatever goodwill existed between those customers and the employer and may damage the reputation of the employer with potential customers. From the customer's perspective, getting dragged into disputes often implicates privacy and confidentiality concerns, causing the customers to retain separate counsel, resulting in yet even more litigation and further spiraling up the fees and costs.

Some agreements restrict the employee from employment within a certain geographical area served by the employer. These agreements are considered more restrictive upon employees than those which ban solicitation or performance, because they require the employee either to work outside the geographical region with which he or she is familiar, or to forego employment entirely for the designated period of time. Such agreements can also trigger litigation to establish whether the geographical restrictions are reasonable. Washington courts have upheld geographical restrictions with a radius up to 30 miles.

There are many other factors which need to be taken into consideration in drafting noncompetition provisions. A reasonable investment in competent drafting can substantially decrease the risk of incurring litigation costs that could easily wind up being 20, 30 or more times that investment.