Washington (Further) Curbs its Enthusiasm for Non-Compete Clauses

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Michelle A. Liebesman

May 30, 2024

In 2019, Washington State enacted a non-compete statute imposing limits on the use of noncompetition agreements (RCW 49.62).  Earlier this year, on March 13, 2024, Washington State Governor Jay Inslee signed into law Substitute Senate Bill 5935 (S.B. 5935), which amends Washington’s existing non-compete statute by expanding the restrictions already placed on employers doing business in Washington.  Employers with Washington-based employees are encouraged to review their non-compete (and non-solicitation) agreements to ensure compliance before these worker-friendly amendments take effect on June 6, 2024.

Here are the notable changes:

• Broader definition of “noncompetition covenant.” B. 5935 expands the definition of “noncompetition covenant” to cover clauses that prevent former employees from “accepting business” or transacting business with a customer. That means that a non-acceptance of business clause will no longer be enforced if it doesn’t meet the requirements of RCW 49.62.
• More limited “sales of business” exception. Previously, non-competes between the seller and buyer of a business were “carved out” or excluded from the requirements of RCW 49.62.  Now, S.B. 5935 limits the “sale of business” exception to the purchase or sale of 1% or more of the business.
• More limited exclusion for “non-solicitation” agreements. Employee and customer non-solicitation agreements continue to fall outside the scope of RCW 49.62, but the new amendments clarify that a customer non-solicit can cover only “current” customers of the employer.  If the customer non-solicit extends to former customers, the enforceability requirements of RCW 49.62 will apply.
• Clarifies timing for providing advance notice of non-compete. RCW 49.62 requires employers to disclose the terms of a non-compete clause no later than when the prospective employee accepts employment.  The amendments clarify that the notice requirement is triggered when the job candidate first accepts the offer, regardless of whether the initial acceptance was verbal, rather than in writing.
• Clarifies what constitutes unenforceable venue and choice of law provisions. The amendments foreclose an employer’s ability to “contract around” Washington law. Specifically, once S.B. 5935 goes into effect, a contract provision in a noncompetition covenant signed by a “Washington-based” employee is void and unenforceable to the extent that it requires the Washington-based employee to litigate outside the state or applies law other than Washington law.
• Broader retroactive application. Under the current statute, Washington employers did not have to formally rescind older non-competes because RCW 49.62 prohibits declaratory judgment actions involving noncompetition agreements entered into prior to January 1, 2020, so long as the covenant is not being enforced.  Now, even if the old covenant is not technically being enforced, the amendments allow declaratory judgment actions if the employer is “explicitly leveraging” a pre-January 1, 2020 covenant. “Explicitly leveraging” isn’t defined, but it could conceivably include threatening litigation or using the existence of the non-compete in wage or settlement negotiations.
• Expanded private right of action to challenge a non-compete. Whereas the original RCW 49.62 provides that only a party to the non-compete can challenge it, the amendments remove that restriction, leaving way for any “aggrieved” person to bring a claim.  Though it is unclear how this provision will be interpreted, a subsequent potential employer would certainly seem to be among the contemplated “aggrieved” parties.

Takeaways for Businesses with Employees who live or work in Washington State:  It is time to take a fresh look at your existing post-employment restrictive covenants.  If your non-solicit prevents acceptance of business or applies to former (rather than just current) customers, it won’t be enforceable under the amended statute, and you will benefit from working with counsel to update your agreements.  Your job offer process also may need some revamping, to make sure that you are providing notice of a non-compete in a timely manner.  Without clear guidance on what it means to “explicitly leverage” a non-compete signed before January 1, 2020, consider seeking legal advice about your existing post-employment enforcement process and checklist, particularly if it contemplates sending demand letters to former employees as a matter of course, threatening litigation, or using the non-compete to extract more favorable settlement terms.  Keep in mind that falling short under the new statute leaves you exposed to litigation from any aggrieved party, not just your former employees.

The author of this article, Michelle A. Liebesman, is a member of the Bar of Pennsylvania.  This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in Pennsylvania, Washington, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist.  Always consult an attorney with specific legal issues.