Yesterday, Washington’s Governor, Jay Inslee signed HB1450 [PDF] which targets the use of restrictive covenants in the State of Washington (the “Non-Compete Act”). The signing of the Non-Compete Act follows the recent settlement on March 18, 2019 of three cases filed by private plaintiffs challenging the no-poaching provisions in franchise agreements of Auntie Anne’s, Arby’s and Carl’s Jr. in the U.S. District Court for the Eastern District of Washington. The new law will take effect on January 1, 2020 and has three significant components:

  1. It places new conditions on the use of any noncompetition agreement by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind. For example, (i) non-competes will only be enforceable against employees making $100,000 annually or independent contractors earning $250,000 annually; (ii) the post-separation duration must not exceed 18 months without clear and convincing evidence that a longer period is necessary to protect business; and (iii) there must be additional consideration paid if the covenant is entered into after the term of employment.
  2. It bans anti-raiding/non-solicitation provisions in vertical franchise agreements. Under Section 7 of the Non-Compete Act, “[n]o franchisor may restrict, restrain, or prohibit in any way a franchisee from soliciting or hiring any employee of” either the franchisor or another franchisee of the same franchisor.
  3. Section 8 of the Non-Compete Act provides that an employer may not restrict, restrain or prohibit an employee earning less than twice the state minimum wage from ‘moon-lighting’ (having another job, being self-employed or working as an independent contractor) unless the work raises legitimate concerns regarding safety, interferes with scheduling or creates conflicts of interest.

Effective January 1st, it will be illegal in Washington state for franchisors to restrict or prohibit its franchisees from soliciting or hiring other franchisees’ employees in the system or employees of the franchisor. However, in a piece of good news for franchisors, the Non-Compete Act excludes from coverage a noncompetition covenant entered into by a franchisee, as long as the franchise sale is properly registered under Washington’s Franchise Investment Protection Act, or exempt from registration.

Violators of the statute may be subject to statutory damages and liable for attorneys’ fees, costs and expenses of the aggrieved party, even if the provision is only partially struck down (blue penciled). In other words, a court may still modify a restrictive covenant so it becomes enforceable, but you will still be subject to damages and penalties. This could further significantly chill the use of noncompetition agreements until the contours of the Act are defined by regulation or case law.

This new statute has broad reaching effects on various types of agreements with a franchise system’s business parties. If you have not already reviewed the restrictive covenants in your franchise agreements as well as agreements with employees and independent contractors, then now is the time to do so!