September 1, 2007
Updated November, 2009
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.
This article concerns the use of non-competition clauses in the employment context. In such an agreement, the employee agrees not to compete against the employer for a specified period, usually within a specified geographic area. From an employer perspective, the 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.
B. Significant Changes in Oregon Law
At the end of its legislative session in the first half of 2007, the Oregon legislature passed a bill containing some drastic changes to Oregon law regarding non-competition and arbitration agreements between employers and employees, and that bill is now before the governor for signature. The governor signed the bill on August 6, 2007, and this significantly changed the law in Oregon. However, the new law only applies to agreements entered after January 1, 2008.
First, the non-competition agreement will not be enforceable unless the fact that a non-competition agreement 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 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 includes such items 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 $61,000. Accordingly, many employees with not be subject to noncompetition agreements. There is an “out” however for employers at subsection (6), which allows employers to buy into enforcing and otherwise unenforceable non-competition agreement.
The new law provides, at subsection (4) that non-solicitation agreements which prohibit contacting employees of the employer or transacting business with customers of the employer are permissible. Additionally, the employer can enforce an otherwise unenforceable noncompetition agreement by paying the employee for the term of the agreement, up to two years, an amount equal to one-half of the total salary and bonus compensation of the employee, or one-half of the median income for a family of four according to the U.S. Census bureau, whichever amount is greater.
The foregoing is only a summary of some of the features of the new law.
C. “Old” Law – The Agreement Must be Made Upon the Initial Employment, or Upon Subsequent Bona-Fide Advancement If Entered Prior to January 1, 2008
A non-competition 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 current Oregon law states 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:
1. Initial employment of the employee with employer; or
2. Subsequent bona fide advancement of the employee with the employer.
There is an exclusoin at ORS 653.295 (4). Subsection (4) provides that bonus restriction agreements, which restrict the rights to bonuses following termination of employment, may be enforced. The bonus restriction agreement exclusion is narrow, and only applies to such bonus restriction agreements after 1983. These general rules apply to agreements entered into before January 1, 2008, although the new law retains an exceptoin for bonus restriction agreements.
Accordingly, employer/employee noncompetition agreements are void and of no effect unless they are entered into at the beginning of employment or upon bona fide advancement under the “old” law.
D. 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. The case law analysis of protectable interests is not entirely uniform, and 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.
E. Drafting Considerations of Non-Competition Agreements
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 business of the employer subject to the restrictions upon competition. Additionally, prohibitions may be placed on certain competitive activities. For example, there may be some type of prohibition against the employee contacting existing customers of the employer, following the termination of employment.
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. These must be defined in reference to a legitimate “protectable interest” of the employer.
The time limitation should also be drafted appropriately, in consideration of the business in question. Oftentimes, the prohibited period inserted in the agreement is 1 or 2 years. Under the new law, it can be no longer than 2 years. But the restriction must be reasonable under the particular circumstances existing.
The protectable interests of the employer should be considered. It is important to carefully consider the statutory enforceability requirements under the new law for agreements entered into after January 1, 2008.
Oregon attorneys differ in their approaches to non-competition and non-disclosure agreements. The author’s personal preference is to draft specifically tailored agreements rather than broadbrush agreements. It is important for the person or business to consult with and retain an attorney with regard to such agreements.
Interestingly, the amended statutes seem to permit non-solicitation terms in agreements, without violating the prohibition against non-competition agreements in many situations. A non-solicitation provision typically prohibits an employee from soliciting business from an employer’s customers or soliciting an employer’s employees for a period of time. Many employers may benefit from carefully crafted non-solicitation terms in their agreements with employees, even when the employer is not able to otherwise use a “non-competition agreement.”
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. Applicable trade secrets should be identified. 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-disclosure agreements (without noncompetition language) will increase in Oregon for workers with salaries under the statutory minimum that is set forth in the present law.
This means that in effect it is possible to get some measure of protection against competition in many situations through the use of a nondisclosure agreement.
It is clear, however, that an employer’s ability to protect its proprietary information is significantly stronger than its ability to prohibit competition outright. ORS 653.295 (5) (for agreements entered into prior to January 1, 2008) expressly states that the limitations upon noncompetition agreements do not restrict an employer from protecting its proprietary information and trade secrets. This limitation is preserved under the new law (ORS 653.295 (5)).
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.
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.
Any noncompetition or non-disclosure agreement in the employment context must be in writing.
F. 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 noncompetition agreement or a form non-disclosure agreement.
G. Enforcing Rights Under a Noncompetition Agreements
There are, in general, 2 primary methods of enforcing rights under a noncompetition 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 noncompetition 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 competing 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 for damages. Such a claim will seek any actual damages (damages suffered as a result of the employee’s breach).
This article is intended to provide general information only, is not legal advice, and should not be relied upon as legal advice.
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 20 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 noncompetition and non-disclosure agreements to meet a variety of business situations. He also regularly advises both employees and employers with respect to noncompetition agreements that are already in place, and litigates claims involving noncompetition agreements. Brad’s phone number is (503) 626 – 3087, and he can also be reached by email at Brad@SchrockLaw.com.