Use of Noncompetition Agreements. Noncompetition agreements are commonly used in employment relationships. They function as restrictive covenants, in which an employee contractually agrees not to participate in certain activities, usually for a set period of time after termination of employment. Often noncompetition agreements prohibit employees from soliciting the employer's clients and/or from working in the employer's field within a limited geographic area.
Consideration. Consideration (something given to the employee in exchange for the promise not to compete) is required for the contract to be valid. Generally, in states where noncompetition agreements are permitted, employment, training or continued employment are sufficient consideration for a noncompetition agreement. An exception is Oregon, where only employment or an advancement (such as raise or promotion) are sufficient consideration.
Antitrust Concerns. Noncompetition agreements have the potential to violate antitrust laws as unreasonable restraints on trade. Courts tend to find that noncompetition agreements are not broad enough in scope to constitute a restraint of trade. However, the Sherman Act, a federal law, as well as state laws regarding unfair competition should be considered when drafting a noncompetition agreement.
Enforcement of Terms of Agreement.
- Total. The goal of an action for breach of a noncompetition agreement is enforcement of the terms of the Agreement by the court. Enforcement will take the form of an injunction, prohibiting the former employee from engaging in specified activities. If the employee continues to act in contravention of the injunction, he/she may be subject to a contempt citation and/or monetary fines.
- Partial - Modified by Court. The court may find that the agreement is only partially enforceable. For example, the court may find that a restriction prohibiting an employee from working for a period of two years within ten miles of the office where he/she has been employed is overly restrictive in geographic scope only. The court may modify the restriction, and enforce it within two miles, or whatever the court determines to be reasonable.
The reasonableness of the geographic scope and the time restriction of a noncompetition agreement varies on a case–by–case basis. The same court may find that a restriction prohibiting a salesman whose territory encompassed the entire state from working for a competitor anywhere within the state for a specified period of time to be reasonable, yet find a restriction prohibiting a health care professional from practicing within 25 miles of the professional practice where he/she was employed overly restrictive geographically. Courts look at the nature of the business and consider the least restrictive alternative which will protect the employer's interests and whether the employee will be precluded from gainful employment if the restriction is enforced.
Remedies, Injunctions and Damages. An injunction enforcing the terms of the noncompetition agreement is the usual remedy. However, if the employer can demonstrate that a quantifiable injury has been sustained, monetary damages may be awarded. A court may issue an injunction and award damages as well.
- Actual. Actual damages are intended to place the employer in the position in which he/she would have been had the employee not breached the noncompetition agreement. A court may award damages which the employer can show were caused by the employee's breach.
- Liquidated. Liquidated damages are those to which the parties have contractually agreed beforehand as appropriate compensation in the event the contract is breached. A liquidated damages clause will be enforced, so long as it constitutes a reasonable forecast of damages, damages would be difficult to calculate with precision, the liquidated amount bears a reasonable relationship to actual damages and the liquidated damages do not constitute a penalty.
- Punitive. Punitive damages are damages intended to punish a defendant for an intentional or grossly reckless wrong. They are generally not awarded in breach of contract actions.
Some states (including Washington) do not allow the recovery of punitive damages unless expressly authorized by statute. However, the Washington Uniform Trade Secrets Act does allow such damages for misappropriation of trade secrets.
In Washington, noncompetition agreements are enforceable only if the agreement is entered into upon the initial employment of the employee, or upon subsequent bona fide advancement of the employee. Courts should consider three factors:
- whether the restraint is necessary for the protection of the business or goodwill of the employer;
- whether it imposes upon the employee any greater restraint than is reasonably necessary to secure the employer's business or goodwill; and
- whether the degree of injury to the public is such loss of the service and skill of the employee as to warrant non-enforcement of the covenant.
Noncompetition agreements in Oregon are enforceable only if the agreement is entered into upon the initial employment of the employee, or upon subsequent bona fide advancement of the employee. Further, the agreement under Oregon law:
- must be partial or restricted in its operation in respect to time or place;
- must be supported by consideration; and
- must be reasonable.
If the agreement is found to be overbroad, the Oregon courts will interpret it in a way deemed to be reasonable, rather than invalidate it.
An Oregon employer must demonstrate to the court that a "protectable interest" exists in order for the noncompetition agreement to be enforced. A protectable interest can be a trade secret, a confidential formula or recipe, valuable customer contacts, or the like.