New Washington State Law Upsets Noncompetition Covenants in the Health Care Community
By Luke Campbell
Attorney
Montgomery Purdue Blankinship & Austin PLLC
Original Publish Date: August 6, 2019
A new Washington State law may dramatically impact how noncompetes are used with health care employees. Starting on
January 1, 2020, the law will potentially apply to all new and existing noncompetition covenants.
A Worker Who Gets a Noncompete Modified is Entitled to Damages and Attorney Fees Even if the Modified Noncompete is Enforceable
Both large and small health care employers across Washington have consistently required physicians and other health care workers to sign expansive (and, frequently, nonnegotiable) noncompetition agreements. This practice used to provide a substantial benefit at little risk.
However, the new law imposes a potentially large cost for overly broad restrictions. The employer must pay the employee’s damages (with a minimum damage amount of $5,000) plus attorney fees, costs, and expenses if a court “reforms, rewrites, modifies, or only partially enforces any noncompetition covenant.”
A recent example highlights how employers used to benefit from overly board noncompetition agreements, but could now experience significant costs. In Emerick v. Cardiac Study Center, Inc., P.S., a cardiologist shareholder and employee sued his employer to have a noncompete declared unenforceable. The noncompetition agreement lasted for five years and prohibited competition in Pierce County and Federal Way.
Previously in Washington, a noncompetition agreement was enforceable if reasonable. In determining reasonableness, the court considers three factors: (1) whether the restraint is necessary to protect the employer’s business or goodwill; (2) whether it imposes on the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill; and (3) whether enforcing the covenant would injure the public through loss of the employee’s service and skill to the extent that the court should not enforce the covenant, i.e., whether it violates public policy.
The court found the cardiologist’s noncompete unreasonable when it balanced the interests of the employer against the public policy interest of maintaining the physician-patient relationship.
However, rather than voiding the entire noncompete, the court modified the noncompete to make it reasonable. The court reduced the geographic restriction from Pierce County and Federal Way to a two-mile radius around the employer’s current offices, reduced the time period restriction from five years to four, specifically allowed the physician to practice at hospitals and emergency care clinics and make house calls within the restricted area, and specifically provided that patients could still select the cardiologist as their doctor.
Even though the employee got the court to extensively rewrite the noncompete, he still lost because his new office was within the revised noncompete zone. The court ordered the employee to pay the employer’s attorney fees and costs, which likely amounted to over $350,000.
While the employer “won” under the old law, under the new law, instead, the employer likely would have had to pay the employee’s attorney fees and damages because the court revised part of the noncompetition covenant! The employer would have enforced its noncompetition agreement, but paid its employee’s attorney fees.
Under the new law, employees may proactively challenge overly broad noncompetition restrictions with the threat of holding the employer liable for damages, plus attorney fees and costs if a court modifies any part of the noncompetition restrictions. As shown by Emerick, it is difficult to impossible to predict how a court will enforce a noncompetition agreement.
Beyond this damage and attorney fee provision, the new law imposes other important restrictions, many of which come with substantial questions.
A Restrictive Covenant Can Only Get Used on Highly Compensated Workers
The new law prohibits noncompetition covenants for all (a) employees with Box One W-2 earnings for the prior year of employment from the enforcing employer of less than $100,000 and (b) independent contractors paid less than $250,000 per year. These thresholds will be adjusted annually for inflation and grossed up for partial years of employment.
The proper measure of wages during the first year of employment (when last year’s wages equal $0) remains uncertain. Further, the law uses an extraordinarily broad definition of employee, which may pick up workers (such as partners or independent contractors) that the IRS does not consider employees. These workers will not have any Box One W-2 earnings, but still might be “employees” for purposes of the new law. The application of the wage threshold to such workers remains unclear. Finally, the law does not specify the measurement year for the independent contractor’s wages (i.e., the previous year, all years, the current year, etc.).
Most Restrictive Covenants Cannot Exceed 18 Months in Duration
Under the new law, a noncompetition covenant with an employee that lasts longer than 18 months is unenforceable unless the employer can prove it is necessary through “clear and convincing” evidence. Clear and convincing means “highly probable” and is something higher than the ordinary civil standard of a preponderance (i.e., more than 50%) and less than the ordinary criminal standard of beyond a reasonable doubt.
Enforcement Requires Severance in the Event of “Layoffs”
To enforce a noncompetition covenant against an employee who is let go as a result of a “layoff”, the new law provides that an employer must pay the employee his or her base salary during the period of enforcement (reduced by compensation the employee makes from subsequent employment).
The law does not define the term “layoff” and so the meaning is unclear. It may have a broad definition (e.g., webster.com defines it as “to cease to employ (a worker) often temporarily”) or a narrower definition (e.g., to terminate an employee for cause, to terminate and not replace an employee, etc.).
Employees Must Receive Advance Notice of Potential Restrictive Covenants
Employers must disclose the terms of the noncompete restrictions to employees in writing no later than the time the employee accepts an offer of employment (and not on the employee’s first day of work). If the agreement becomes enforceable only at a later date due to changes in the employee’s pay, the employer must notify employees of that possibility.
No Forum Shopping
The law prohibits an out-of-state forum selection provision for Washington-based employees or independent contractors.
Exceptions to the New Law
The new law provides exceptions for the following items: (a) a nonsolicitation agreement (defined very narrowly); (b) a confidentiality agreement; (c) a covenant prohibiting use or disclosure of trade secrets or inventions; (d) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest (which might not include ordinary agreements among owners); or (e) certain covenants entered into by franchisees.
In short, Washington’s new law may dramatically change the use and enforceability of restrictive covenants in the health care industry. Employers and workers should review their existing agreements and proposed new agreements in light of the new law and engage an attorney if they have questions about enforceability after the new law becomes effective on January 1, 2020.
Luke Campbell regularly represents employers, physicians, dentists and other health care providers in a variety of employment transactions, including the drafting, negotiating, enforcing, and resisting noncompetition clauses and agreements. You can reach him at lcampbell@mpba.com or 206-682-7090 or view his full bio here.