Iconic fish toss at Pike Place Market.On Tuesday (March 24), I provided a quick update to alert readers that Washington passed a new law banning noncompetes. I did not, however, have time to fully study the new law, so I said that I would be providing a deeper analysis soon.
This is that analysis.
Flawed Findings
The new law starts with new legislative findings, as follows:
(1) The legislature finds that noncompetition covenants hinder innovation and entrepreneurship, suppress wages, reduce job mobility, and ultimately harm consumers and the economy. In 2019 the legislature took a critical step forward by banning the use of noncompetition covenants for lower-wage earners. This did not go far enough. Research shows that noncompetition covenants restrict workers’ mobility, impede efforts to correct inequities, and significantly suppress workers’ wages across all sectors, including for those not subject to covenants, or subject to covenants that are unenforceable under state law. Even among supposed high-wage earners, the suggestion that these covenants are bargained is largely a legal fiction. Noncompetition covenants are often unilaterally imposed by employers and businesses without meaningful negotiation. Businesses have more specific and effective legal means to protect intellectual property, trade secrets, and clients without harming workers, contractors, and the public.
(2) The evidence is clear. Banning noncompetition covenants will incentivize innovation and entrepreneurship, increase wages, and even reduce health care costs. To that end, in 2024 the federal trade commission adopted rules banning noncompetition covenants nationwide. Unfortunately, those rules have not been fully implemented. Washington’s workers and businesses should not have to wait years for federal court rulings on a nationwide ban when the state has the authority to extend these protections.
(3) The legislature hereby intends to ban noncompetition covenants for all Washington-based workers and businesses. Yet the legislature recognizes the limitations of a state ban. Workers in all jurisdictions need these same protections. But other states may be slow to act or will not act despite compelling economic interests. The state also does not intend for this act to modify or interfere with the sovereignty of tribal nations or with their exclusive jurisdiction to govern employment standards for employees working in Indian country for a business owned by a federally recognized tribe or tribal member. By joining other states that have banned noncompetition covenants, Washington will demonstrate the benefits to other states, tribes, and jurisdictions. Let the actions of this legislature to improve prosperity for all pave the way for the nation.
One might ask (that “one” being me): What if the findings are wrong? (Which I believe is the case — at least in significant part.) What if the research upon which these findings are based (though the best-available research) is fundamentally flawed? (Which I believe much of it is.)
I have a long-in-the-works blog post that will discuss these issues. Apparently, I need to finish it more quickly than I thought.
What happened?
As of June 30, 2027, all employee noncompetes and certain other agreements will be banned in Washington (state).
Not only that, but all existing employee noncompetes (and other agreements covered by the new law) will become void and unenforceable — and companies will have to notify their existing and former employees and independent contractors that their agreements are void and unenforceable.
What agreements will be banned?
True noncompetes. The new law retains the existing definition, though eliminates the passive voice: “‘Noncompetition covenant’ includes every written or oral covenant, agreement, or contract that prohibits or restrains an employee or independent contractor from engaging in a lawful profession, trade, or business of any kind.”
Nonsolicitation and no-recruit agreements that are not narrowly tailored to fall within the narrow subset of acceptable nonsolicit / no-recruit agreements. (See below for details about acceptable nonsolicitation and no-recruit agreements.) So, for example, nonsolicitation agreements that prohibit solicitation of former customers will be banned. Interestingly, nonsolicits of prospective customers were previously subject to the noncompete law (and therefore could not be used with employees who could not have a noncompete); now they are outside the scope of the law if the other conditions are satisfied.
Training repayment agreements (pejoratively called “TRAPs”) that fail to meet the specific requirements for acceptable repayment agreements. (See below for details about acceptable repayment agreements.)
No-accept / no-service agreements. These are defined as: “agreement[s] that directly or indirectly prohibit[] the acceptance or transaction of business with a customer, patient, or client . . . .”
Forfeiture-for-competition and similar agreements (e.g., forfeiture-for-solicitation). The new law will ban (as a noncompete) “any provision in an agreement that threatens, demands, requires, or otherwise effectuates that an individual return, repay, or forfeit any right, benefit, or compensation, as a consequence of the individual engaging in a lawful profession, trade, or business of any kind.” There is a real question how broadly a court will interpret this language in light of the language that “nonsolicitation agreements, which prohibit an employee from actively soliciting current customers or employees away from the employer, are not prohibited; however, the definition of nonsolicitation agreement must be narrowly construed.” The Massachusetts Supreme Court faced a similar issue — albeit with less conflicting language — in deciding that forfeiture-for-solicitation agreements are not covered by the Massachusetts Noncompetition Agreement Act.
Performance space agreements: Instructively, the performers’ lobby had a say in this: “‘A noncompetition covenant’ also includes a covenant, agreement, or contract between a performer and a performance space, or a third party scheduling the performer for a performance space, that prohibits or restrains the performer from engaging in a lawful performance.”
What agreements will survive?
Nonsolicitation agreements, provided they fit within the following: “an agreement between an employer and employee that prohibits solicitation by an employee, upon termination of employment: (a) Of any employee of the employer to leave the employer; or (b) of any current or prospective customer, patient, or client of the employer to shift business away from with the employer if the employee established or substantially developed a direct relationship with the customer, patient, client, or prospect through the employee’s work for the employer and the prohibition expires no later than 18 months following termination of employment.” Oddly, the new law states — in the context of findings — that “nonsolicitation agreements, which prohibit an employee from actively soliciting current customers or employees away from the employer, are not prohibited; however, the definition of nonsolicitation agreement must be narrowly construed.” That language is both narrower and more broad than the definitional language in the statute.
Confidentiality agreements. I think it’s safe to assume that Washington will be continuing to follow the lead of California and others (including the abandoned FTC rule) and find that overly broad confidentiality agreements can operate as noncompetes and therefore fall within the noncompete ban.
Invention assignment agreements. The law is a bit vague, but it allows “a covenant prohibiting use or disclosure of trade secrets or inventions.”
Sale-of-business covenants. The new law continues the exemption for “a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest, but only if the person signing the covenant purchases, sells, acquires, or disposes of an ownership interest representing one percent or more of the business . . . .” (The statute added only the word “ownership” into the exemption.)
Covenants in franchise agreements. To qualify, it must be “a covenant entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1) . . . .”
Repayment of expenses agreements that are “a written agreement to repay out-of-pocket educational expenses if the agreement: (A) Expires within 18 months of the employee’s start date for employment; (B) limits repayment to the pro rata portion of the remaining time of the 18-month period; and (C) releases the employee from the obligation to repay if the employee’s separation from employment is based on ‘good cause’ under RCW 50.20.050.”
When will these changes take effect?
The law takes effect on June 30, 2027. Accordingly, all existing noncompetes will become void and unenforceable on June 30, 2027.
What do companies need to do — and not do?
What can employers do?
Where does Washington’s ban fit within the broader context?
Washington is only the fifth state with an outright ban.
For over a 100 years, only California (in 1872), North Dakota (in 1865), and Oklahoma (1890) had bans that continued until today. Although Michigan passed a ban in 1905, it was rescinded in 1985. And while some would say that Montana (which banned noncompetes in 1895, but later seems to have lifted that ban) and Nebraska have bans too, but their laws are more nuanced and leave room for arguments (at least in theory). In short, in the past 100 years, only Minnesota (in 2023) and now Washington (effectively 2027) have bought into the hype and adopted a ban. In contrast, as discussed previously, New York Governor Kathy Hochul, Maine Governor Janet Mills, and Governor McKee have all seen both sides of the issue and vetoed complete bans. Instructively, since Minnesota banned noncompetes in 2023, there have been efforts to reverse the ban.
Separately, Washington’s law is just one of five new noncompete-related laws this year — and there have been a total of 100 noncompete bills pending in 34 states so far this year. More on that in an upcoming post.
Stay tuned.
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I should note that, on Tuesday, right after posting the update, I discovered that the final bill sent to the governor addressed and corrected the date that the law would become effective and the date by which companies would be required to send notice. I immediately corrected the blog post, thanks to a few people who quickly reached out to let me know, including David Kurtz, Mike Rosen, and Tom Fiascone. I greatly appreciate their help!