A noncompetition agreement in the employment context is a contract under which the employee agrees not to compete against the employer for a specified period, usually within a specified geographic area. Although a noncompetition agreement can be a separate agreement, non-competition clauses are sometimes part of a broader contract. The use of the term “noncompetition agreement(s)” in this article covers both forms.
From an employer perspective, a noncompetition agreement can be a useful tool to prevent an employee from copying the same business model within the relevant market, or from appropriating existing customers from the employer. From the employee perspective, a noncompetition agreement can often unreasonably restrict the employee’s ability to seek new employment and make a living in the field in which he or she has been trained or had experience.
One thing to mention – it is possible for an employer to enforce an otherwise unenforceable non-competition agreement by paying money to the employee for the purpose of enforcing the agreement. In my experience, this does not come up often in actual practice. In the interest of simplicity, those provisions (contained at the time of this writing at ORS 253.295 (6) are not discussed in this article.
2. Significant Changes in Oregon Law
At the end of its 2007 legislative session, the Oregon legislature passed a bill containing some drastic changes to Oregon law regarding non-competition and arbitration agreements between employers and employees. This significantly changed the law in Oregon. However, this “new” law only applies to agreements entered after January 1, 2008; agreements entered into before that date are still covered under the older law.
First, after January 1, 2008, a non-competition agreement is not enforceable unless the fact that a non-competition agreement is required as a condition of employment was communicated in a written offer to the employee at least 2 weeks before the first day of employment, or it was entered into upon a bona-fide promotion or advancement. Second, the employee must be of a type described in ORS 653.020 (3), which in general is an administrative, executive or professional person who has discretion and exercises independent judgment, primarily is engaged in management, intellectual or creative tasks and is paid on a salary basis. Additionally, the employer must have a protectable interest. The statutory definition of such an interest sets forth several non-exclusive factors that might be present, such as employee access to trade secrets, or other competitively sensitive confidential business information that may not qualify as trade secrets. Additionally, there is a minimum salary requirement, which generally must be at least the median family income for a 4-person family according to the U.S. Census Bureau. At the time of publishing this article, that was approximately $62,000, which was the most recent figure for the State of Oregon on the US Census Bureau website. Interestingly, the statute itself does not specify whether it is an Oregon median income or a US median income. But in any case, many employees are not subject to non-competition limitations due to the salary requirements.
The foregoing is only a summary of some of the features of the new law.
3. Even Prior to January 1, 2008, the Agreement Must be Made upon the Initial Employment, or Upon Subsequent Bona-Fide Advancement
A noncompetition agreement in Oregon between an employee and his or her employer (entered into prior to January 1, 2008) is only valid if it was entered into at the beginning of employment, or it was entered into upon a promotion to a new position (which must be a bona fide advancement). Specifically, the previous law stated at ORS 653.295 that:
A noncompetition agreement entered into between an employer and employee is void and shall not be enforced by any court in this state unless the agreement is entered into upon the:
- Initial employment of the employee with employer; or
- Subsequent bona fide advancement of the employee with the employer.
The present law states that the employee must be informed of the condition at least 2 weeks prior to employment, or upon a bona fide advancement. But the notification requirement should not be read to mean that the agreement does not still have to be entered into at the beginning of employment. That requirement existed in some older case law, and is rather fundamental to the concept of consideration being exchanged for the restriction. There is an exception at ORS 653.295 (4) which provides that bonus restriction agreements, which restrict the rights to bonuses following termination of employment, may place some limitations upon competition. However, this exception is narrow, and only applies to such bonus restriction agreements after 1983.
Accordingly, employer/employee non-competition agreements are void (or voidable – see my article on this issue) and of no effect unless they are entered into at the beginning of employment or upon bona fide advancement.
4. There must be a Protectable Interest
Case law has made it clear that the Employer must have a protectable interest in order to enforce a non-competition agreement. This was true under the older law, and is now an express requirement in the statute. The case law analysis of protectable interests is not uniform, and the analysis can be fairly complex as it is done on a case-by-case basis. However, valuable customer lists and trade secret information are two items that regularly tend to be claimed as protectable interests.
5. Drafting Considerations of Non-Competition Agreements
a. Defining of the Scope and Protectable Interest
In general, courts will only enforce noncompetition clauses to the extent that they place reasonable restrictions upon competition in terms of the narrowness of the field that is protected, as well as limitations upon the geographic and temporal scope. In determining how broad the field should be, it may not be reasonable to restrict competition in “any business of the employer”, for example, if the employee only worked or has specialized knowledge or training in one division, or with respect to selected product lines. Care should be taken to specify the field that is subject to the restrictions upon competition.
Care should also be taken in defining the geographic scope of the prohibition against competition as well as the length of time for which the limitation will last. Thus, as an example, an electrical contractor with a limited territory may prohibit an employee from performing electrical contracting work within 20 miles its principle place of business. However, an Internet-market driven business may prohibit the employee from competing anywhere in the United States, or even the world. For a chiropractor, perhaps 5 miles, or a limitation to certain zip codes might be reasonable.
The time limitation should also be drafted appropriately, in consideration of the business in question. Oftentimes, the prohibited period is 1 or 2 years. Under Oregon law, it can be no longer than 2 years, prior to January 1, 2016, and 18 months for agreements entered into subsequent to January 1, 2016.
Naturally, it is also important to consider the statutory enforceability requirements. Non-competition agreements are now simply inappropriate in certain situations, although non-solicitation agreements be appropriate for those situations.
Non-competition agreements will usually contain non-solicitation provisions also. These are provisions that prevent the employee from soliciting clients or employees of the employer for a period of time. Non-solicitation agreements are specifically allowed under Oregon law, even in situations where a non-competition agreement would be inapplicable under the statute. Unquestionably, in many employment situations, a non-solicitation agreement with confidentiality provisions is preferable in Oregon to a non-competition agreement, which carries many more hurdles in its inherent enforceability.
Oregon attorneys differ in their approaches to non-competition, non-solicitation and non-disclosure agreements. The author’s personal preference is to draft specifically tailored agreements rather than broad brush agreements. It is important for the person or business to consult with and retain an attorney with regard to such agreements.
b. Non-Disclosure Provisions
Another component of many noncompetition agreements are non-disclosure provisions. Non-disclosure provisions provide that the employee will not disclose certain defined confidential or proprietary information. Again attorneys differ in their approaches. But in general non-disclosure provisions should be carefully crafted to deal with the subject matter under the particular contract. The important thing to recognize, however, is that one effect of nondisclosure provisions can be to restrict competition by restricting the employee’s ability to use certain proprietary information. It is likely that the use of non-solicitation/non-disclosure agreements (without noncompetition language) will continue to increase in Oregon.
This means that it is possible to get some measure of protection against competition in many situations through the proper use of a nondisclosure agreement.
An employer’s ability to protect its proprietary information is significantly stronger than its ability to prohibit competition outright. ORS 653.295 (5) expressly states that the limitations upon noncompetition agreements do not restrict an employer from protecting its proprietary information and trade secrets.
c. Choice of Law and Forum
For an Oregon employment situation, the agreement will normally choose Oregon law as the law governing interpretation of the agreement, and will select Oregon (or even a county or city in Oregon) as the choice of venue for resolving any dispute that arises under the agreement.
d. Dispute Resolution
If binding arbitration is desired as the method of dispute resolution, there must be properly drafted arbitration provisions in the agreement. Arbitration can be more expeditious than litigation, and it can be less expensive to resolve disputes by arbitration. However, these perceived benefits of arbitration are not a given. Additionally, arbitration is usually final and binding and not subject to appeal (except upon some relatively narrow grounds). But, if selecting arbitration as a dispute resolution method in a non-competition agreement, then some attention must be given to allow a party to seek appropriate interim injunctive relief in court.
e. Attorneys’ Fees
Unless the agreement provides for the recovery of attorneys’ fees in the event of a dispute, then each party must pay for its own attorneys’ fees in the event of a dispute. Under the American Rule (followed in Oregon) each party bears its own attorneys’ fees, in the absence of an agreement or specific law to the contrary.
f. In Writing
Any noncompetition or non-disclosure agreement should be set forth in a written agreement signed by both the employee and the employer.
g. Concerning Form Agreements
Unless an agreement form has been crafted by an attorney for his or her client to meet the specifics of a particular business situation, with respect to a particular position, it is not safe to use a form non-competition agreement or a form non-disclosure agreement. If it is worth using a non-competition agreement, then it is worth the financial investment to get a proper agreement.
6. Enforcing Rights under a Noncompetition Agreements
There are, in general, 2 primary methods of enforcing rights under a non-competition agreement. The first is to obtain injunctive relief. An injunction is essentially a court order or judgment that a person must stop from doing something. In the case of an employee violating a non-competition agreement, for example, the injunction sought might prohibit both the employee, and the employee’s new employer (this hypothetical employer we will call “NewCo”) from being engaged in a competitive position while the employee is employed at NewCo, or may prevent the employee from working for NewCo. There are specific procedures that allow for temporary, preliminary and permanent injunctions.
Additionally, the employer can sue (or make an arbitration demand, depending upon the agreement) for damages. Such a claim will seek any actual damages (damages suffered as a result of the employee’s breach), as well as any consequential damages, such as lost profits.
Typically, when a suit is filed against an employee, the complaint seeks both injunctive relief and damages.
This article is intended to provide general information only, is not legal advice, and should not be relied upon as legal advice.
The foregoing article is informational only, is general in nature, and is not legal advice. Anyone seeking legal advice should schedule an appointment with an attorney knowledgeable in this area. Bradley Schrock is an attorney in Beaverton, Oregon. Schrock Law Office, PC handles business and corporate matters, licensing, business litigation, estate litigation, estate planning and general civil litigation including personal injury. Mr. Schrock has over 19 years of experience as an attorney. He also speaks Japanese, lived in Japan for six years during which time he was an attorney in a Toyota Group company working on international licensing, intellectual property and a variety of international business transactions. He has drafted numerous non-competition, non-solicitation and non-disclosure agreements to meet a variety of business situations. He also regularly advises employees and employers with respect to noncompetition agreements that are already in place. He has regularly litigated non-competition, non-solicitation, trade secret and related issues in both federal and state court. Brad’s phone number is (503) 626 – 3087.