Are Noncompetition Agreements Enforceable?

As a practical matter, every noncompetition agreement (“NCA”) is a restraint on trade. Because public policy generally disfavors restraints on trade, NCAs are similarly disfavored. But for those mourning the agreements they signed, don’t celebrate just yet. Because NCAs are not unenforceable per se, they may still be deemed valid if they are reasonable in view of the circumstances under which they were entered. Sheppard v. Blackstock Lumber Co., Inc., 85 Wash.2d 929, 540 P.2d 1373 (1975); Racine v. Bender, 141 Wash. 606, 615, 252 P. 115 (1927).

In evaluating the issue of reasonableness, courts engage in a balancing test to determine if the need for the NCA to protect the business interests of the one requiring it is greater than the competing harm caused on the one restrained, and on the public that will be deprived of the services of the one restrained during the term and in the geographic area of the restraint. Racine v. Bender, supra; Restatement (Second) of Contracts § 188 (1981).

Because of those competing interests, courts are tasked with insuring that NCAs are no greater in scope than reasonably necessary to protect the business or good will of the party requiring the restraint. Wood v. May, 73 Wash.2d 307, 438 P.2d 587 (1968); Central Credit Coll. Control Corp. v. Grayson, 7 Wash.App. 56, 60, 499 P.2d 57 (1972).

How can you know whether an agreement is “reasonable”? Because reasonableness is subjective, there is no way to test its limits with any certainty. But one may engage in the same sort of analysis that a court would perform to predict a more likely than not outcome.

Analysis of Competing Factors

The first factor is whether the restrictive covenant is warranted under the circumstances. For example, a covenant in the context of employment may be viewed differently than a covenant given in the course of the sale of a business. Employers have a legitimate interest in protecting their client base and their trade secrets. Therefore, an employee who, by virtue of the employment, is exposed to the employer’s customers and secrets would reasonably be restricted from later disclosing or using that information to the employer’s disadvantage, within limits. The same would be true if the employer provided unique training that gave an employee a new skill set that, but for a restriction, could be used to the employer’s detriment.

The second factor deals with the harm to the employee caused by the restraint. People must have an opportunity to earn a living. Generally, a court will evaluate the reasonableness of the restraint by analyzing its geographic and temporal restrictions. The broader the geographic area and the longer the time restrictions are, the greater the likelihood that an NCA will be deemed unreasonable.

The third factor addresses the harm to the public caused by the lack of services it will have from the one restrained during the term of the NCA. That harm may include restraint of trade, limits on employment opportunities, and the denial of public access to necessary services. Organon, Inc. v. Hepler, 23 Wash.App. 432, 436 n. 1, 595 P.2d 1314 (1979). But notwithstanding that harm, the court must balance its concerns with the employer’s right to protect its business.

What if the NCA is unreasonable?

If a court deems an NCA to be unreasonably broad or unreasonably restrictive, it may still be enforceable to the extent that a court deems reasonable. Thus, courts are tasked with evaluating a contract’s purposes to enforce the contract to the extent necessary to accomplish those purposes. An NCA given in connection with the sale of a business may predictably be more restrictive than one given in connection with employment. The stakes are greater. The buyer’s investment in the business can be rendered worthless if the seller is permitted to immediately set up shop across the street.

To address the issue, attorneys will often include contractual provisions that permit the court to narrow unreasonable contracts to the maximum extent necessary to render the contract reasonable. For example, in Wood v. May, supra, using its equitable powers, the court enforced an unreasonably broad restraint by narrowing a 100 mile geographic area to the greater Seattle area, and reducing the five year time period to two years.

While there are no standard times or distances that a court will, or will not enforce, the best rule of thumb continues to be the smell test. If it seems excessive, it probably is excessive. And if it smells like California (a state that proscribes NCAs), it will not be enforced in any event.

  • Copyright © Gregory D. Lucas 2014
  • Leave a comment

    Filed under Useful Information

    Leave a Reply

    Fill in your details below or click an icon to log in: Logo

    You are commenting using your account. Log Out /  Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out /  Change )

    Connecting to %s