Imagine a hospitalist is offered a lucrative position in a hospital, but his previous employment agreement prevents him from taking the new position because the agreement contained a noncompete agreement. To a lot of people this scenario may seem absurd. However, in many cases, physicians are faced with a similar situation and they are forced to determine whether a noncompete clause in their employment contract restricts their future employment options.
On January 1, 2020, new laws became enforceable in Washington state that limit an employer’s use of noncompete provisions. Under the new law, noncompete agreements will be enforceable only if:
- When hired, the employer discloses the terms of the covenant in writing to the prospective employee no later than acceptance by the employee of an offer of employment; or
- If entered into after commencement of employment, the employer provides independent consideration; and
- The employee earns more than $100,000 a year (RCW § 49.62.020), or for an independent contractor earns over $250,000 a year (RCW § 49.62.030). These amounts will be adjusted annual to match the rate of inflation. (RCW § 49.62.040)
Finally, the new law states that even if an employee or independent contractor meet the income/revenue threshold, any noncompete agreement that exceeds 18 months is presumed to be unreasonable and therefore, unenforceable. RCW § 49.62.020. To rebut the presumption, an employer must establish with clear and convincing evidence that the duration is necessary to protect the employer’s business and goodwill.
While Washington’s new laws may be helpful to some employees and subcontractors with modest income/revenue streams, most physicians’ income in Washington state will easily exceed the $100,000.00 annual income threshold. Therefore, only Chapter § 49.62’s temporal restrictions may provide physicians refuge from a noncompete agreement within their employment contract. Notably, Washington courts have previously concluded that geographically restricted areas greater than two miles are reasonable in the context of a noncompete covenant. Emerick v. Cardiac Study Ctr., Inc., 189 Wn. App. 711, 716, 357 P.3d 696, 699 (2015). Given the proximity of hospitals in the greater Puget sound area, many physicians may find themselves subject to enforceable noncompete agreements that severely restrict their employment opportunities for up to 18 months.
Given the level of compensation that physicians enjoy, physicians will likely have to rely heavily on Washington case law to determine the enforceability of their noncompete agreements, even with Washington’s new law. Keep in mind that a noncompete agreement cannot be more restrictive than is reasonably necessary to protect the legitimate business interests of employers. The test for reasonableness takes into account “whether or not the restraint is necessary for the protection of the business or good will of the employer,” and “whether it imposes on the employee any greater restraint than is reasonably necessary to secure to the business of the employer, or the good will thereof, such protection.” Labriola v. Pollard Grp., Inc., 152 Wn.2d 828, 846, 100 P.3d 791, 799-800 (2004). Critically, courts will analyze a non-compete agreement in light of the following factors to determine if it is reasonable:
- 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. Emerick v. Cardiac Study Ctr., Inc., P.S., 189 Wn.App. 711, 721-22 (2015).
In short, employers can take measures to protect legitimate business interests, but may not unreasonably restrict the freedom of current or former employees to earn a living. Id. Noncompete agreements are therefore unreasonable whenever they are used to secure employers against employees’ lawful use of labor and skills. Alexander, 19 Wn. App. at 687; Copier Specialists, Inc. v. Gillen, 76 Wn. App. 771, 774, 887 P.2d 919 (1995). Noncompete agreements designed to stabilize a company’s current workforce through unreasonable restraints are similarly unenforceable. Labriola v. Pollard Grp., Inc., 152 Wn.2d 828, 846-47, 100 P.3d 791, 800 (2004). Critically, the burden is on the employer to demonstrate the reasonableness of a restrictive covenant. Sheppard v. Blackstock Lumber Co., Inc., 85 Wash.2d 929, 933, 540 P.2d 1373 (1975); Techworks, LLC v. Wille, 2009 WI App 101, 318 Wis. 2d 488, 498, 770 N.W.2d 727 (Ct. App. 2009).
In Copier Specialists v. Gillen, 76 Wn. App. 771, 772, 887 P.2d 919, 919 (1995), Gillen, a salesman for Copier Specialists, signed a noncompete agreement in which he agreed that after his employment with Copier Specialists, he would not work for one of Copier Specialist’s competitors for a three-year period. After six months of employment, Copier Specialists terminated Gillen. After Gillen’s termination, he started a position for one of Copier Specialists’ competitors but not as a salesman. Copier Specialists sued alleging that Gillen breached his noncompete agreement. However, the trial court dismissed Copier Specialists’ claims holding that the covenant was not necessary to protect Copier Specialists’ business. On appeal, the court affirmed, finding that Copier Specialists failed to show that the covenant was necessary to protect its business from any advantage Gillen may have gained by reason of the skills and training acquired during his six months of employment. The court of appeals also noted that Gillen had very limited contacts with Copier Specialists’ customers and there were no client lists to protect. The training Gillen acquired during his employment, without more, did not warrant enforcement of the covenant not to compete. Id.
Another way to invalidate a non-compete agreement is the potential harm it may cause to the public. Courts will consider harm to the public that a noncompete agreement may cause by retraining trade, limiting employee mobility, and the restraint the agreement may have on the public’s access to necessary services. Emerick v. Cardiac Study Ctr., Inc., 189 Wn. App. 711, 716, 357 P.3d 696, 699 (2015). The enforcement of a physician noncompete denies public access to necessary services provided by a physician when there is a lack of available physician. Notably, courts will look at the totality of circumstances when interpreting the noncompete agreements.
Not all noncompete agreements are enforceable. There are ways to argue or negotiate around a noncompete agreement. However, before any physician signs an employment contract, she should speak to an attorney beforehand to understand the ramifications of any noncompete agreement she may sign and to discuss ways to negotiate the noncompete agreement so that it does not unnecessarily restrict her future employment options.
MDK Law Attorney Farnoosh Faryabi counsels and represents physicians and other medical professionals in a variety of legal issues.
This blog contains general information and is not intended to provide specific legal advice or establish an attorney client relationship. This blog should not be used as a substitute for legal advice from a licensed attorney in your state.