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The Franchise Memorandum

Washington State to Enact Law Regulating Noncompetes

The Washington Legislature recently passed HB1450, a bill that will codify certain limits on the enforceability of noncompetition agreements and outlaw anti-poaching agreements in Washington. It is anticipated that Governor Jay Inslee will sign the bill into law soon, and once enacted, it will take effect on January 1, 2020. HB1450 applies to 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. It does not include: (i) nonsolicitation agreements; (ii) confidentiality agreements; (iii) covenants prohibiting the use or disclosure of trade secrets or inventions; (iv) covenants entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (v) a covenant entered into by a franchisee when the franchise sale complies with the Washington Franchise Investment Protection Act (“WFIPA”). While the bill appears on its face not to apply to noncompetition covenants in franchise agreements, franchisors should note that franchises not granted in compliance with WFIPA would likely fall under the law’s reach. Standard noncompetition covenants in franchise agreements that extend to the franchisees’ owners and managers, and which require their owners or managers to enter into a separate form of noncompetition agreement with the franchisee could be interpreted to undermine the franchise exemption in the new law.

Under HB1450, employers may not enter into or enforce a noncompetition agreement unless an employee’s yearly earnings exceed $100,000 as adjusted annually for inflation. If the restriction applies to an independent contractor, the income threshold is $250,000, which will also be adjusted for inflation. Noncompetition agreement terms exceeding 18 months are presumed to be unreasonable and unenforceable, but even if the noncompetition agreement complies with the law in all other respects, the agreement must still comply with existing common law standards regarding reasonableness in duration, scope, and geographic area. The scope of the forum selection and choice of law aspects of the bill are also unclear. The law would apply to Washington-based employees and independent contractors and invalidate provisions that select forums outside of Washington and deprive restricted persons of the “benefits of Washington law.” Subject to certain exceptions, restricted persons may bring a private cause of action if such person’s noncompetition agreement violates the law. Once enacted, the law will apply retroactively to existing noncompetition agreements.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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