|Oregon State Bar Bulletin AUGUST/SEPTEMBER 2007|
Historically there has been tension between employee continuity and employee loyalty on the one hand and employee freedom and mobility on the other. Employers desire stability, consistency and the ability to prevent former employees from becoming direct competitors with them; employees, on the other hand, desire the ability to earn a living by using their skills anywhere they desire. For centuries, the covenant not to compete has been the vehicle employers have used to try to prevent employees from leaving and taking with them some of the former employer’s goodwill.
Early English cases held that noncompetition restrictions were unenforceable as restraints on trade, since courts felt that it was outrageous to force an employee to leave a village or township in order to earn enough to feed one’s family.1 Later, the English courts softened their position, upholding such restrictions only when they were limited in time, scope and geographic area.2 Under the "rule of reason," in order for a noncompetition clause to be enforceable, it may be no broader than is necessary to protect the employer’s business, and it may not be so restrictive as to prevent a former employee from earning a living.
In the United States, the majority of courts that considered the validity and enforceability of noncompetition agreements have upheld them with varying limitations. Some states, such as California, have legislatively declared noncompetition restrictions for employees to be void as against public policy. It was apparently felt that in order to attract and keep talented workers within the geographic boundaries of the state, it would be necessary to provide those individuals with the ability to continue working in their chosen fields even after their initial employment in that state ended.
Oregon initially upheld noncompetition restrictions, so long as they were limited in time and place and reasonably calculated to protect a legitimate interest of the employer. Consideration "not grossly inadequate" was also required. Eventually, the legislature recognized a potential problem in permitting employers to present employees with agreements containing noncompetition restrictions during the course of employment, and in order to inhibit the practice of "an employer imposing a new agreement on an old [existing] employee as an additional requirement of continuing in the same job,"3 ORS § 653.295 was enacted. It provided that noncompetition provisions were enforceable only if entered into at the time of initial hiring. In 1983, the statute was amended to also permit noncompetition provisions upon "substantial bona fide advancement of an employee within the company."
The most recent round of revisions to the statute, found in Senate Bill 248, passed by the Oregon legislature on June 27, 2007 and signed by Gov. Kulongoski on August 6, 2007, dramatically limits the enforceability of noncompetition agreements in Oregon.
Current law provides that noncompetition agreements between an employer and an employee are void except when entered into upon the "initial employment" or "subsequent bona fide advancement" of the employee. Under SB 248, an employer retains the right to have an employee execute a noncompetition agreement upon "subsequent bona fide advancement," though the agreement itself must otherwise conform to the new law. Noncompetition agreements for new employees are voidable unless, at least two weeks before the first day of employment, the employer notifies the prospective employee in writing that a noncompetition agreement is required as a condition of employment.4
While this requirement will protect many new employees from an unwelcome surprise after they have quit their previous jobs, it may cause a hardship to many employers since employees are often hired less than two weeks before the planned starting date.
The bill goes on to provide that a noncompetition agreement is voidable unless the employee is exempt from overtime pay5 and the employer has a "protectable interest." Generally, this means that the employee has access to trade secrets6 or other "competitively sensitive confidential business or professional information" that does not qualify as a trade secret. There is an exception to this general rule. An employer will also be deemed to have a protectable interest where the employee is employed as on-air talent in the business of broadcasting7 and where, in the year preceding the termination of employment, the employer has "expended resources equal to or exceeding ten percent of the employee’s annual salary to develop, improve, train or publicly promote the employee" on media the employer does not own or control. In order for this exception to apply, the employer must, for the entire noncompetition period, pay the employee an amount equal to 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. It is felt that employees in this category enjoy an enhanced reputation and goodwill because of their employer’s promotional and training activities. It would, therefore, be likely that these employees would be in a position to carry that goodwill with them when working for a new employer.
Finally, the bill provides that a noncompetition agreement will not be enforceable unless the employee’s salary plus commissions at the time of termination of employment exceed the median family income for a four-person family as determined by the U.S. Census Bureau. This provision is not applicable when the on-air talent exception applies.
If an employer desires to enforce a noncompetition agreement entered into with an employee who is nonexempt and/or is paid less than 50 percent of the median family income for a family of four, the employer can do so, but it will be expensive. For the full period of noncompetition restriction the employer must pay 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. Therefore, employers will likely choose to exercise this option only for key personnel with some prominence in the field or for employees who have the ability to profit from the goodwill of the employer.
In addition, while current law allows the finder of fact to decide whether a given term is reasonably calculated to protect the employer’s interests, the bill limits enforcement of a noncompetition agreement to two years from the date of termination of employment.
While the bill generally favors employees, one benefit to employers is that nonsolicitation agreements will no longer be considered to be noncompetition agreements.8 Further, the bill retains the current law’s provisions that the above-noted requirements do not apply to bonus-restriction agreements and do not affect the rights of employers to protect their trade secrets.
It should be noted that under the bill, noncompetition agreements that do not meet 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.
The new law will take effect Jan. 1, 2008, and will apply only to agreements entered into on or after that date. If, therefore, an employer desires to have its employees bound by the current, more employer-favorable form of noncompetition agreement, it should promptly put such arrangements in place if possible. Remember, under current law there are restrictions on when enforceable noncompetition agreements can be entered into. It is, therefore, important for employers who desire to enjoy the benefits of the current version of noncompetition agreements for new hires to do so before the new law takes effect. For existing employees, as noted above, noncompetition agreements are not enforceable unless they are entered into after a bona fide, substantial advancement.
Whether you customarily represent employers and believe that it is necessary for them to be able to protect the goodwill of their businesses, or whether you represent employees and feel that mobility and free choice are important rights which must be preserved, the new legislation will present you with a challenge. Employers will no longer have the ability to demand that all employees agree to noncompetition restrictions when hired or meaningfully promoted, and employees will likely find enforceability of the new form of noncompetition agreement more inevitable. Only time will tell whether this new legislation will benefit employment relations or whether it will deter businesses from locating in Oregon — or actually frighten some existing Oregon businesses away.
1. Cases from as far back as 1414 held that masters could not impose restrictive covenants on their apprentices. See Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv L.Rev. 625, 631-632 (1960).
2. In Mitchell v. Reynolds 24 Eng. Rep. 347, 349 (Q.B. 1711), the court held that a restrictive covenant could be valid if limited in scope, time and geography in conjunction with the lease of a business. Later cases adopted this "rule of reason" in connection with employment cases as well.
3. Hearing on SB 748 before the S. Comm. on Bus. & Consumer Affairs, 1983 Leg. 62d Sess. (Or 1983).
4. "A noncompetition agreement entered into between an employer and employee is voidable … unless (a)(A) The employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a noncompetition agreement is required as a condition of employment…." SB 248 (Or. 2007).
5. An exempt employee is defined as "an individual engaged in administrative, executive or professional work who: (a) performs predominately intellectual, managerial or creative tasks; (b) exercises discretion and independent judgment; and (c) earns a salary and is paid on a salary basis." ORS 653.020(3).
6. The definition of trade secret is that found in ORS 646.461.
7. The bill defines "broadcasting" as "the activity of transmitting any one-way electronic signal by radio waves, microwaves, wires, coaxial cables, wave guides or other conduits of communications." SB 248 (Or. 2007).
8. The bill provides that a "covenant not to solicit employees of the employer or solicit or transact business with customers of the employer" is not subject to the new law. SB 248 (Or. 2007).
ABOUT THE AUTHOR
Leonard D. DuBoff, a principal in the DuBoff Law Group, is the author or co-author of numerous scholarly articles, Bulletin articles and more than 20 books, including The Law (In Plain English) for Small Businesses, 5th ed. (Sphinx Publishing, 2007), The Deskbook of Art Law (Oceana Publications/Oxford University Press, current and ongoing updates to booklets) and Art Law in a Nutshell, 4th ed. (Thompson/West, 2006). Christy O. King, also a principal in the DuBoff Law Group, is the editor of Critical Issues, a publication of the DuBoff Law Group, and has co-authored numerous books and articles, including The Law (In Plain English) for Restaurants (Sphinx Publishing, 2006), The Deskbook of Art Law (Oceana Publications/Oxford University Press, current and ongoing updates to booklets) and First Amendment and Censorship (Oceana Publications, 2005).
© 2007 Leonard D. DuBoff and Christy O. King