Significant Changes And Developments In Non-Competition Law In Oregon, Wisconsin And Massachusetts
Significant changes in non-competition law have occurred in Oregon and Wisconsin, and a distinct line of non-competition cases continues to develop in Massachusetts. These changes and developments, which apply immediately to employers with operations in those states, are summarized below.
Oregon has enacted a non-competition law that marks a radical change in favor of employees. This new law, which imposes numerous restrictions on employers, applies to all non-competition agreements entered into after January 1, 2008. The new restrictions impose some unusual requirements, as follows:
1. New Employees Must Receive Advance Notice. Oregon non-competition agreements are enforceable as to new hires only if the employer provides written notice at least two weeks before the commencement of employment that a noncompetition agreement is required as a condition of employment. Thus, employers should consider including this information in their job applications and offer letters.
If an employer wants an existing employee to sign a non-competition agreement, Oregon law continues to require that this be done in connection with a “bona fide advancement.”
2. Non-Exempt And Lower-Paid Employees Cannot Be Subject To Such Agreements. Employees properly classified as non-exempt under Oregon’s wage and hour law cannot be bound by a non-competition agreement. Similarly, a non-competition agreement will not be valid as to an exempt employee unless, at termination of employment, his or her gross annual compensation exceeds the median income of a four-person family under U.S. Census Bureau guidelines (presently, about $61,000).
3. Employers Must Pay Income Substitution During The Restrictive Period. Oregon employers seeking to enforce non-competition agreements must pay income substitution to the affected employees during the restrictive period. This payment must be equal to the greater of: (a) fifty percent of the employee’s gross annual salary plus commissions, or (b) fifty percent of the median income for a four-person family under U.S. Census Bureau guidelines (presently, about $30,500). This provision might result in employers narrowing the circumstances in which they require non-competition agreements.
4. Non-Competition Agreements Cannot Exceed Two Years. Under the new Oregon law, the term of a noncompetition agreement cannot exceed two years from the date of termination of employment. If a non-competition agreement contains a longer term, then the portion exceeding two years will not be enforceable.
Importantly, the new Oregon restrictions do not apply to either: (a) covenants not to solicit employees or customers of the employer, or (b) “bonus restriction agreements,” which require an employee who goes to work for a competitor to forfeit unpaid profit sharing or bonus compensation. Thus, the new law, while one of the most restrictive in the nation, still provides a measure of protection against competitive harm.
As a result of the new law, Oregon employers are likely to use non-competition agreements sparingly, i.e., only with employees who have access to trade secrets and narrowly defined confidential business information; require employees involved in developing and maintaining customer goodwill to sign non-solicitation agreements only; and become more expansive and creative in their use of bonus restriction agreements.
In Wisconsin, if a non-competition or non-solicitation agreement calls for the restrictive period to be extended by the duration of a breach by the employee, then this provision may operate to void the entire agreement. This new rule was announced by the Wisconsin Court of Appeals in H&R Block Eastern Enterprises, Inc. v. Swenson, 745 N.W.2d 421 (Wis. Ct. App. 2007).
In this case, the employer, H&R Block, was in the business of preparing tax returns for its customers. To protect its customer goodwill, the employer required each tax preparer to sign an employment agreement containing non-competition and non-solicitation provisions. These provisions prohibited the tax preparer from competing with the employer and soliciting its customers for two years after termination of employment. Each provision qualified the two-year restriction by stating “such period to be extended by any period(s) of violation” (the “Extension Provision”).
Subsequently, six tax preparers resigned. Each had from ten to twenty-five or more years of experience with H&R Block. Two of the tax preparers formed a competing business and hired the other four. H&R Block filed a lawsuit alleging, among other things, that the former employees breached the restrictive clauses in their contracts. The trial court, however, dismissed H&R Block’s claims. The trial court reasoned that the two-year restriction was adequate to protect H&R Block’s interests and, therefore, that the Extension Provision rendered this restriction “plainly invalid.”
On appeal, H&R Block argued that the Extension Provision was reasonable because its effect was to restrain the former employees for a total of only two years, a reasonable restrictive period. H&R Block explained that “a one-day violation leads to a one-day extension, a one-week violation to a one-week extension.” Thus, in H&R Block’s view, the Extension Provision merely ensured that H&R Block received the benefit of its bargain.
The Appeals Court rejected H&R Block’s argument on the basis that the Extension Provision rendered the two-year restriction unduly vague. In the court’s words:
What constitutes a ‘one-day’ violation? Is it any day in which there is any contact with a company client for whom one of the listed services is to be provided? Does the violation then extend until the service is completed for that client? If there are contacts with different company clients on one day for the purposes of providing the listed services, does that count as a one-day violation, the same as if there were contact with only one company client in a day? These questions, unanswered by the contract terms, mean that a former employee cannot tell from the terms of his or her contract how long the extension will be for the particular conduct in violation of the clauses.
The court also determined that if “legitimate disputes” arose over whether certain conduct violated the non-competition and non-solicitation provisions, then the employee would not have guidance until a court resolved the disputes. Only then, explained the court, would the employee know if there is an extension and how long it is. Thus, in the court’s view, the effect of the Extension Provision was to make the duration of the restraint “not a fixed and definite time period but a time period that is contingent upon outcomes the employee cannot predict.”
For these reasons, the Appeals Court affirmed the trial court’s decision to dismiss H&R Block’s claims. Consequently, the six former employees were permitted to continue with their competitive business, even though they had well-developed relationships with H&R Block clients, many of whom returned year after year.
Provisions like the one at issue here are common in non-competition and non-solicitation agreements. Accordingly, Wisconsin employers should immediately review and, if necessary, revise all such agreements to remove provisions of this kind. Otherwise, the interests that they sought to protect through non-competition and non-solicitation provisions will be at risk.
A distinct line of cases concerning non-competition agreements continues to develop and survive in Massachusetts, posing a trap for the unwary employer. Under these cases, a material change in an employee’s job, as might result from a promotion or lateral move, can operate to void any existing non-competition or non-solicitation agreement between the employee and the employer.
To illustrate, suppose that a new hire accepts the position of sales representative and signs a non-competition agreement at the commencement of employment. Three years later, based on her exemplary sales record and the strength of her client relationships, this employee is promoted to regional sales manager. This promotion may operate to invalidate the non-competition agreement—even though the employee possesses significant client goodwill and, as a result of the promotion, will be in a position to develop this goodwill further. In this unfortunate scenario, the employer proceeds on the assumption that the non-competition agreement remains in place, only to discover years later, after the employee departs and causes competitive harm, that the non-competition agreement had become invalid and, therefore, is no longer enforceable.
The reasoning behind this noteworthy line of cases is not entirely clear. The decisions state that the material job change renders the existing restrictive covenant void for lack of consideration. Employee expectations, however, may be a consideration. In this respect, the decisions suggest that employees generally do not expect non-competition agreements to follow them up the corporate ladder, but rather, view such agreements as part of the terms and conditions of employment that they leave behind upon accepting a new role. Under this theory, seeking to enforce a non-competition agreement signed prior to one or more material job changes would constitute unfair surprise as to the employee. Evidently, and unfortunately, the courts are less concerned with the unfair surprise that this line of cases imposes on the employer. The key decisions in this line of cases are Cypress Group, Inc. v. Stride & Associates, Inc., 17 Mass. L. Rep. 436 (Mass. Super. Ct. 2004); R.E. Moulton, Inc. v. Lee, 18 Mass. L. Rep. 57 (Mass. Super. Ct. 2004); and Lycos, Inc. v. Jackson, 18 Mass. L. Rep. 256 (Mass. Super. Ct. 2004).
The solution for employers is to condition promotions and other such job changes upon the employee’s execution of a new non-competition agreement. In this scenario, the increased compensation and benefits of the new position would serve as consideration for the new non-competition agreement. The employee could decline to accept the new non-competition agreement and, as a result, forego the promotion, but this would be unlikely, particularly because a similar non-competition agreement already will have been in place.
As these changes and developments in Oregon, Wisconsin and Massachusetts demonstrate, non-competition laws differ dramatically from state to state, posing challenges for all employers and especially those with multi-state operations. The Firm is available to assist with the review, development and enforcement of non-competition and related agreements to help protect employers against undue competitive harm caused by departing employees.