Misguided New Law Muddles Noncompete Agreements

Just when you thought you finally understand the nuances of noncompetition agreements, the Oregon Legislature has thrown us a curve ball. Maybe more like a screwball. The new statute draws artificial distinctions and imposes arbitrary guidelines as a result of legislative compromises.

For many years, we have operated with a simple rule that a noncompetition agreement can only be enforced against a departed employee if the agreement was entered on or before the day the employee started work or when the employee received a meaningful promotion. The courts told us that noncompetition agreements could restrict departed employees from reasonable geographic territories and restrict them from transacting business with the employer’s customers and employees. The temporal length of the restriction is determined by the legitimate needs of the employer.

This remains the law for noncompetition agreements entered through the end of this year, but a whole new set of rules apply to noncompetition agreements entered on and after January 1, 2008.

The 2007 Legislature was asked by the Bureau of Labor and Industries, with support from other pro-labor groups, to make some adjustments to Oregon’s noncompetition agreement laws. Their issues were not unreasonable. First, they wanted to protect laid off workers from being subject to noncompetition agreements. After all, if the employer cannot provide enough work to keep the employee busy, why should the employee be twice penalized by requiring that he endure the firing and also change careers or move? Second, they wanted to limit noncompetition agreements to higher income earners. Lobbyists were armed with anecdotes of aggressive noncompetition enforcement against low-level employees.

However, what ended up on the Governor’s desk did not quite hit the goals. The protection for laid off workers fell to the cutting room floor entirely. Laid off workers remain open to insult and injury. The Legislature also rejected language that would have voided noncompetition agreements with all but the most highly compensated employees. Instead, it enacted a bright line rule that gives additional compensation to earners in the middle and below, and prohibits them entirely for non-salaried hourly employees. Under the new law, employers can enforce valid noncompetition agreements against salaried workers earning more than the U.S. Census Bureau median income for a family of four as of the date of termination. But if the salaried worker earns less, the employer must pay the departed employee a severance of one-half that figure during the restricted period in order to be able to enforce the noncompetition agreement. Currently, the median income is about $62,000 per year. The message is that if you want to use a noncompetition agreement to protect your proprietary information, you better be prepared to pay for it.

The Legislature also added a new requirement that an employer must disclose in writing to the new employee at least two weeks before starting work that the employer requires a noncompetition agreement. The statute does not give us any guidance as to what form that must take. Courts will be left to wrestle with whether an offer letter stating that a “noncompetition agreement is required” are magic words alone, or if the employer must describe the terms of that agreement.

Geographic noncompetition agreements are also limited to two years, without exception. In addition, they can only be used to protect an employer’s proprietary information and trade secrets. Customer relationships are not included as protectable interests that will allow territorial noncompetition agreements.

The real loophole in the revised statute is the new distinction between “noncompetition agreements,” which are limited to geographic and territorial restrictions on the one hand, and agreements restricting departing employees from transacting business with the employer’s customers and employees on the other. The latter, often called “nonsolicitation agreements,” have long been analyzed under the existing statute. But the new statute draws a distinction by excepting out such agreements from the statute’s new rules, and stripping the old rules from such agreements at the same time. Thus, employers appear free to require nonsolicitation agreements from their employees without meeting the prior notice requirements, the severance obligation for middle earners and below, or the two-year limitation. Perhaps unintentionally, the Legislature also left off the former statutory requirement that such nonsolicitation agreements must be entered when an employee starts work or receives a meaningful promotion. This might mean employers will be free to impose nonsolicitation agreements at any time.

The sponsoring legislator explained to me that the new statute is not without its problems. “It’s progress,” he told me, “but we may need to go back and fix a few things during the next session.”

Practical Tips:

• Determine the genuine bases for having a restrictive covenant for departing employees. Are you trying to protect proprietary information, such as trade secrets, or are you trying to protect customer relationships?
• If you are trying to protect customer relationships, as in the case of sales representatives, consider using an agreement that prohibits departing employees from transacting business with your customers for a reasonable period of time. Note that the new statute may have unintentionally given employers an opportunity to bind existing employees to such an agreement.
• If you are trying to protect proprietary information, strictly follow and document the two-week advance notice to new hires and limit the restriction to two years.
• The new statute makes it more expensive to enforce new geographic noncompetition agreements against employees who earn under about $62,000. This should not discourage employers from getting noncompetition agreements from new hires who are lower paid. If the employee still earns less than $62,000 at the time of departure, the employer can elect to waive the geographic noncompetition agreement and not make severance payments.
• See a qualified lawyer to update your existing forms for noncompetition agreements and offer letters.
• Implement any new protocol by including and educating human resources and any other managers involved in hiring.

This article was published in the Portland Business Journal on August 24, 2007.