Recent federal court interpretations of Washington’s Noncompetition Covenants Act, Chapter 49.62 RCW, (“Act”) may give employers new confidence in using properly drafted nonsolicitation agreements with their independent contractors, regardless of how much the independent contractors are paid. Some degree of caution is still warranted, however, since the matter has not been conclusively decided by a binding Washington state court opinion.
Generally, a noncompetition covenant is a contract that restricts an employee or contractor from engaging in a trade or profession, usually during, and for a period after, their employment. A nonsolicitation agreement is a similar but narrower contractual provision that typically prohibits an employee or contractor from soliciting away the clients, customers, or employees of their former employer. Under the Act, noncompetition covenants are subject to strict regulation. For example, one of the restrictions is that an employer cannot have an enforceable noncompetition agreement with an independent contractor unless they are paying the independent contractor more than $250,000 per year (annually adjusted for inflation—$291,482.95 in 2023). Employers enforcing covenants that do not comply with the Act may be liable for damages, statutory penalties, and attorney fees.
By contrast, the Act provides that covenants that constitute “nonsolicitation agreements” are not subject to the restrictions applicable to noncompetition covenants, including the minimum compensation requirements. As a result, employers have continued to be able to use properly drafted nonsolicitation agreements with employees after the Act took effect. However, the Act’s definition of “nonsolicitation agreement” has created a concern that the Act did not create a similar exception for independent contractors.
The Act defines nonsolicitation agreement as: “an agreement between an employer and employee that prohibits solicitation by an employee, upon termination of employment: (a) Of any employee of the employer to leave the employer; or (b) of any customer of the employer to cease or reduce the extent to which it is doing business with the employer.” RCW 49.62.010(5) (italics added). On its face, this definition, which only references employees, could lead one to conclude that the exception for nonsolicitation agreements does not apply to independent contractors, which was the interpretation by one federal court in 2021. See University Insurance, LLC v. Allstate Insurance Company, 564 F.Supp.3d 934 (W.D. Wash. 2021). As a result, some employers have declined to use nonsolicitation agreements where they could not otherwise meet the strict requirements for enforcing a noncompetition covenant, including that the independent contactor meets the statutory income threshold out of a concern that a court could find the agreement to be in violation of the Act.
Since then, however, the same federal court has reversed its position. In Tori Belle Cosmetics LLC v. Meek, No. C21-0066RSL, 2022 WL 670923 (W.D. Wash. Mar. 7, 2022), the court observed the Act defines “employee” and “employer” by reference to another statute—RCW 49.62.010—which, in turn, defines “employer” and “employee” to include independent contractors. Based on this more thorough examination of the Act, the Court concluded nonsolicitation agreements between businesses and independent contractors fall within the statutory exception and are not subject to the strict limitations on noncompetition covenants under the Act. The court reaffirmed this analysis in a similar ruling a few months later in Tori Belle Cosmetics LLC v. McKnight, No. C21-0145RSL, 2022 WL 3927069 (W.D. Wash. Aug. 31, 2022).
While the statutory analysis found in the Meek and McKnight cases is well-reasoned, the matter has not yet been decided conclusively by a binding Washington state court opinion. Federal court opinions reviewing state law generally can be used only as persuasive authority and are not binding on the state courts. No Washington state court has yet had an opportunity to examine the issue. As a result, while, for now, employers may be more confident entering into nonsolicitation agreements with independent contractors in situations where they otherwise would not meet the requirements for an enforceable noncompetition covenant, they should be mindful that this continues to be a developing area of law in Washington State. This blog will continue to be updated with new court and legislative opinions on the matter. If you have any questions related to noncompetition or nonsolicitation agreements, please contact Nate Somers, Nate Close, or one of the other attorneys in our business transactions group.