What’s Wrong With Some Friendly Competition?

Unlike a generation ago, employees in the modern workplace frequently work for many different companies over the course of their career. With the cost of replacing and re-training an employee averaging from $15,000 – $20,000, many employers are desperate to discourage employees from leaving. One way that is becoming more popular is the use of non-competition agreements.

What is a Non-Competition Agreement?

A “non-competition agreement” is an agreement between a worker and an employer in which the worker agrees he will not work for a competitor of the employer or establish his own competing business, or otherwise “[provide] products, processes or services that are similar to the employers products, processes or services for a period of time or within a specified geographic area after termination of employment.”[1]

The policy underlying non-competition agreements is to protect a business’s confidential information and goodwill, not to force someone to remain with a company by preventing him from otherwise being able to pursue a living in his field. Therefore, historically, most U.S. courts have upheld non-competition agreements only if they balance the interests of a company with an employee’s right to make a living in his chosen profession.

Each state has different requirements for what constitutes an enforceable agreement; some, like California, discourage the practice so strongly that they are essentially void as a matter of public policy. Many states require that restrictions on an employee’s ability to continue working in her field be limited in time, scope, and geographic area. For example, a provision that prohibits a research physician from working for a neurosurgical research lab within 2 hours or 150 miles of her current employer, for a period of 1 year after leaving her employment, might be a reasonably narrow and enforceable restriction, while asking her to not work for any research lab in the United States for 10 years would likely be overly broad and unenforceable. Some states, like Idaho, limit the use of such agreements to only “key employees” or independent contractors, and have a myriad of additional requirements for enforceability.

Oregon Allows Non-Competition Agreements if they Meet Strict Requirements

In Oregon, current law requires that all non-competition contracts entered into on or after January 1, 2008, are only enforceable if they meet a number of strict requirements.[2]

The first requirement concerns timing. An employer must notify the employee, in writing, that a non-competition agreement is required two weeks before he starts working for the employer. An employer can only require a current employee to sign a non-competition agreement if the employee will, in turn, receive a “bona fide advancement.” Bona fide advancement means that an employee’s scope of work and responsibilities will materially increase, and the employee’s status within the company will improve.[3]

An employer also must show that it has a protectable interest at stake. A “protectable interest” in this context means that the employee will have access to trade secrets or “competitively sensitive confidential business or professional information that otherwise would not qualify as a trade secret, including product development plans, product launch plans, marketing strategy or sales plans.” (There are also special rules for “on-air talent” that you should investigate further if applicable.) Employees who don’t have access to any such sensitive information are not properly subject to restrictions on their subsequent employment.

Another important requirement is that the employee be the kind of employee classified as excluded by Oregon wage laws relating to overtime, meal breaks, etc.[4] The category most frequently applicable to non-competition agreements is that covering “an individual engaged in administrative, executive or professional work who… [p]erforms predominantly intellectual, managerial or creative tasks.” Non-competition agreements for low-level hourly workers are unlikely to comply with this requirement.

Finally, in order for a non-competition agreement to be enforceable in Oregon, the subject employee must meet minimum salary requirements: her salary (plus any commissions) at the time of termination of employment must exceed the median family income for a four-person family as determined by the U.S. Census Bureau.

Note: It is possible to overcome the salary or exempt-status requirements and enforce the terms of a non-competition agreement if an employer pays the employee the greater of (a) 50 percent of the employee’s salary plus commissions at the time of termination or (b) 50 percent of the median family income for a four-person family as determined by the U.S. Census Bureau, for the full period of noncompetition restriction.

A non-competition agreement will only be enforced in Oregon for a maximum of two years for agreements entered into before January 1, 2016. Otherwise valid agreements that exceed the time restrictions will be enforced only up to two years after the last day of employment. Due to recent changes in the law, non-competes entered into after January 1, 2016 may be no longer than eighteen months.

What if there’s a conflict between laws of different states?

Usually the law where an employee works applies, even if the company is located in another state where the agreements are enforceable. So, if an employee works for a company based in Texas, but works in its Oregon location, Oregon law would apply to determine whether his noncompetition agreement would be enforceable.

Some companies include a provision that the law of a particular state (usually one in which the company is domiciled) controls the interpretation and enforcement of the agreement. This issue often arises when an employee works in a state that strongly disfavors noncompetition agreements who wishes to avoid being bound by an agreement containing a forum selection or choice of law clause indicating another state’s laws.

In response to these sorts of forum selection clauses, Oregon courts have determined that there are important public policy interests in enforcing Oregon’s requirements for non-competition clauses. Oregon courts have declined to uphold non-compliant agreements with choice-of-law provisions for other states, noting that “[a]n Oregon employer cannot circumvent Oregon laws designed to protect Oregon workers simply by decreeing that the laws of another state will apply.”[5] However, if the employee consents and submits to the jurisdiction of the courts in the other state knowingly and willingly, especially if he works remotely in Oregon for a company based in another state, Oregon courts might decline to exercise jurisdiction over litigation related to the agreement, subject to the applicable facts and circumstances. As companies and employees become more and more mobile and working arrangements become more flexible, litigation will continue to establish new precedent for how to enforce non-competition agreements across state lines.

Non-Competition Agreements Aren’t the Last Word

Oregon’s non-competition statute also specifically notes that it does not restrict “the right of any person to protect trade secrets or other proprietary information by injunction or any other lawful means under other applicable laws.” This includes remedies under the Oregon Uniform Trade Secrets Act, which prohibits misappropriation of trade secrets,[6] as well as non-disclosure agreements that cover trade secrets, confidential information, and otherwise sensitive business information.

Non-solicitation agreements are also enforceable, so long as they are carefully drawn and narrowly tailored. Specifically, courts try to ensure that those agreements that attempt to broadly restrict employees from soliciting clients are deemed impermissible non-competition agreements.[7]

Enforcing Non-Competition Agreements

Finally, it is important to understand that under Oregon law, noncompetition agreements that do not comply with statutory requirements are “voidable” rather than “void.” This means that a noncompliant agreement will be enforced unless one of the parties chooses to challenge and void it.

Oregon courts are loathe to “re-write” specific terms of non-competition agreements that are non-compliant or oppressive, because a policy of voiding unreasonable agreements in their entirety encourages employers to draft fair and enforceable agreements: “Employers drafting non-compete agreements might also be encouraged to overreach, if they know the worst that could happen is the court will strike the most egregious provisions. The better approach is to void unreasonable agreements.”[8]

If a party breaches an enforceable non-competition agreement, the aggrieved party may seek injunctive relief (i.e., a court order restraining competitive activity), damages, and other relief under the parties’ agreement.

If you are subject to a non-competition agreement and concerned about your rights or obligations, or if you have been asked to sign a non-competition, non-disclosure or non-solicitation agreement, or otherwise need advice about any of these documents, you should seek counsel from an experienced attorney.

The content of this legal blog is for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. This blog is not legal advice and no attorney-client relationship created between you and Bristow-Ford Law or Susan Bristow-Ford. You should not act upon this information without seeking advice from a lawyer licensed in your own state or jurisdiction. No information herein should be used as a substitute for competent legal advice from a licensed professional attorney in your state or jurisdiction and your use of this information is at your own risk. The information herein may not reflect the most current legal developments, verdicts or settlements and may be changed, improved, or updated without notice. Bristow-Ford Law or Susan Bristow-Ford is not responsible for any errors or omissions in the content of this site or for damages arising from the use or performance of this site under any circumstances.

Written with the assistance of attorney Jamie Pfeiffer.

 


[2] ORS § 653.295 applies to all agreements entered in on or after January 1, 2008. For contracts prior to that date, the previous version of the statute would apply, which had fewer technical requirements and allowed a much broader range of agreements.

[3] Nike, Inc. v. McCarthy, 379 F3d 576 (9th Cir. 2004).

[4]Classes of employees excluded from the wage-and-hour protections of §§ 653.010 through 653.261 are enumerated in ORS § 653.020.

[5] Konecranes, Inc. v. Sinclair, 340 F.Supp.2d 1126 (D. Or. 2004).

[6] ORS §646.641 et seq.

[7] See, e.g., Dymock v. Norwest Safety Protective Equip. for Or. Indus., 334 Or. 55 (2001), overruled on other grounds, 45 P.3d 114 (Or. 2002) and First Allmerica Fin. Life Ins. Co. v. Sumner, 212 F. Supp. 2d 1235, 1239 (D. Or. 2002), interpreting overbroad non-solicitation agreements as non-competition agreements and holding them to statutory requirements.

[8] Konecranes, supra, at 340 F. Supp. 2d 1131.

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