WASHINGTON PUTS SUBSTANTIAL LIMITS ON NONCOMPETE COVENANTS

(Please read the disclaimer below this article.)

By Dirk Bartram

October, 2019

Washington has adopted a new statute that puts significant restrictions on noncompetition covenants with employees and independent contractors.  The statute has an effective date of January 1, 2020.  Before that date, businesses need to review their noncompetition covenants signed with Washington employees and independent contractors for compliance with the new law.

Following are some key aspects of the statute:

Definition of noncompetition covenant

The new law restricts noncompetition covenants.  The term “noncompetition covenant” in the new law includes every written or oral covenant, agreement or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business.  The new law, however, exempts covenants entered into by a person buying or selling the goodwill of a business or an ownership interest.  It also exempts nonsolicitation agreements, confidentiality agreements, and covenants entered into by a franchisee when the franchise sale complies with the Washington franchise registration requirements.  Nonsolicitation agreements are narrowly defined by the new law, so employers should not assume their nonsolicitation clauses are unaffected by the new law without verifying that they meet the statutory definition.

Earnings Thresholds

Under the new law, a noncompetition covenant can’t be enforced against an employee unless the employee’s earnings from the party seeking enforcement, when annualized, exceed $100,000 per year.  A noncompetition covenant cannot be enforced against an independent contractor unless the independent contractor’s earnings from the party seeking enforcement exceed $250,000 per year.  These earnings thresholds are adjusted every September 30 for inflation, and the adjustment applies the following January 1.

Time limit

After the new law’s effective date, noncompetition covenants lasting longer than 18 months after employment are presumed unreasonable and unenforceable.  The employer can rebut this presumption by proving by clear and convincing evidence that a duration longer than 18 months is necessary to protect the employer’s business or goodwill.

Employer disclosure requirements.

A noncompetition covenant will be unenforceable against an employee: (i) unless the employer discloses the terms of the noncompetition covenant to the prospective employee in writing no later than the employee’s acceptance of the job offer; and (ii)  if the agreement becomes enforceable only at a later date due to changes in the employee’s compensation, unless the employer specifically discloses that the agreement may be enforceable against the employee in the future.

Independent consideration required after employment.

The new law follows the existing law in that if a noncompetition covenant with an employee is entered into after employment, it will be unenforceable unless the employer provides independent consideration to the employee for the covenant.  Merely continuing an employee’s employment is not independent consideration.  Examples of independent consideration might include, for instance, increased salary, a promotion or bonus.

Violations trigger new cause of action against violators

If a noncompetition covenant violates the new law, the aggrieved employee or independent contractor may bring a cause of action against the violator for legal relief.  Under this cause of action, if the court or arbitrator determines that a noncompetition covenant violates the new law, the violator is required to pay the greater of $5,000 or actual damages, plus reasonable attorneys’ fees, expenses and costs.  In addition, if the court or arbitrator does not invalidate the entire noncompetition covenant, but reforms, rewrites, modifies or only partially enforces it, the party seeking enforcement is still required to pay the greater of $5,000 or actual damages, plus reasonable attorneys’ fees, expenses and costs.  There is an exception to the application of this new cause of action:  it may not be brought regarding a noncompetition covenant signed prior to the effective date of the new law (January 1, 2020) if the noncompetition covenant is not being enforced.   Thus even noncompete covenants signed before the effective date must comply with the new law in order to be enforced.

Layoffs

For laid off employees, a noncompetition covenant is not enforceable unless enforcement of the noncompetition covenant includes compensation equivalent to the employee’s base salary for the period of the enforcement, less compensation earned through subsequent employment.

Employers can’t avoid application of the new law through choice of venue or choice of law clauses

The law prevents employers from avoiding application of the new Washington law.  A noncompetition covenant signed by a Washington-based employee or independent contractor can’t be enforced if it (i) requires the employee or independent contractor to adjudicate the noncompetition covenant outside of Washington, or (ii) applies a state’s laws other than Washington’s, which deprives the employee or independent contractor of the protections of the new law.

Upshot for Employers

Employers must now decide if under the new law, noncompetition covenants with Washington employees and independent contractors will still benefit their businesses and, if they will, then employers must insure that the noncompetition covenants comply with the new law.  If employers already have noncompetition covenants with employees/independent contractors, the employers must have them evaluated carefully for compliance with the new law, and have them revised to the extent they are noncompliant.

Because of limited space, this article does not address all aspects or nuances of, or all situations covered by, the new law.  If you would like further guidance, feel free to contact Dirk Bartram at Henke Bartram PLLC.

Important disclaimer:  Do not rely upon the information in this article when acting or refraining from acting in your situation without seeking appropriate legal or other professional advice.   This article is intended for general information purposes only, is not a comprehensive treatment of its subject matter, and may not reflect the law in your jurisdiction.  Information important to your situation may have been omitted.  This article may not reflect the most current developments, and it is not updated for developments occurring after the article is written.  This article does not constitute legal or other professional advice to you.  Your use of the information in this article is at your own risk and does not form an attorney-client relationship.

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We help entrepreneurs and businesses buy, sell and create companies, and help them complete other transactions that are key to their advancement.  We are:

  • Veteran business lawyers. We don’t delegate to junior lawyers, so our clients get the seasoned judgment of a tested business lawyer, every time.
  • Lawyers with a CEO’s outlook. We pay close attention to the legal details, but always with the larger business purpose in mind.
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Our service approach is entrepreneurial–we provide creative, proactive, high caliber legal work. See more about us at www.henkebartram.com. Contact us at dbartram@henkebartram.com to find out if we’re the right lawyers for you. Initial consultations are free.

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Washington’s Real Estate Tax:
Substantial Changes in Rates, Transfers of
Controlling Interests 

Important Disclaimer: The materials appearing below are intended for general information purposes only and may or may not reflect the most current legal developments.  These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation.  Your use of the information in these articles is at your own risk and does not form an attorney-client relationship.  Articles are not updated for developments occurring after the article is written.

By Dirk Bartram
July, 2019

On January 1, 2020, substantial changes in the Washington’s real estate excise tax (REET) will take effect.  The REET applies to sales of real property in the state and to transfers of controlling interests in entities that own such real estate.  The changes will reduce the tax paid by most selling homeowners, but many other property sellers, particularly those in the Seattle metropolitan area, could see a significantly higher tax.  The changes also lengthen the time period over which a transfer of a controlling interest is measured.  The latter change has the potential for complicating transfers of minority interests in entities that own Washington real estate.

New Graduated Tax Rates

Under the current law, a state REET and a local REET are imposed on the sale of Washington real property (with limited exceptions).  The state REET is currently a flat 1.28% of the selling price, and the local REET varies by local jurisdiction.  In Seattle (and in many other jurisdictions), the local REET is .5%, which when combined with the state REET produces a total REET of 1.78%.

The new law imposes new graduated state REET rates as follows, except for property classified as timberland or agricultural land.  (Local jurisdictions will continue to apply their own REET on top of the state REET):

  • 1.1% of the portion of the selling price that is less than or equal to $500,000
  • 1.28% of the portion of the selling price that is greater than $500,000 and equal to or less than $1.5 million.
  • 2.75% of the portion of the selling price that is greater than $1.5 million and equal to or less than $3 million.
  • 3% of the portion of the selling price that is greater than $3 million.

The state rate for land classified as timberland or agricultural land remains at 1.28%.

To illustrate, suppose that commercial property in Washington is sold for $10,000,000 and that no exemption applies.  Under the existing law, the sale would trigger a state REET of $128,000 plus the local REET.  Under the new law, the sale would trigger a state REET of $269,550 plus the local REET.  The calculation of the state REET portion under the new law is shown below:

$500,000 at 1.1 %                                $5500

$1 million at 1.28%                             $12,800

$1.5 million at 2.75%                         $41,250

$7 million at 3%                                   $210,000

Total state REET                                  $269,550

Starting in 2022, and every four years thereafter, the state may adjust the selling price thresholds of the graduated rates.  Adjustments are based on the growth of the consumer price index for shelter or 5%, whichever is less.  The rate adjustments will apply to sales occurring after the adjustment year.

Controlling Interest Changes

The REET is not only imposed on the direct sale of Washington real property, but also on the transfer or acquisition of a controlling interest in an entity owning such property.  That rule exists to prevent sellers from evading the REET by selling real estate indirectly, through the sale of ownership interests  in LLCs, corporations, partnerships, trusts, associations or other entities that hold title to the real estate.  A controlling interest is 50% or more of the entity interests (as described in the statute).

Under the current law, the tax is triggered by the transfer of a controlling interest within any twelve-month period.  Under the new law, the measurement period is thirty-six months instead of twelve.  That means that under the new law, in an entity owning Washington real estate, a series of transfers of minority interests over a 3-year period can trigger the tax if the total of those minority interests constitutes a controlling interest.  This extension of the measurement period, together with the increase in rates at higher thresholds, will require entities holding Washington real property to pay extra attention to the REET in any plan to transfer minority interests over time.


Get a Handle on These Issues If You’re Doing Business Outside the State

Important: The materials appearing below are intended for general information purposes only and may or may not reflect the most current legal developments.  These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation.  Your use of the information in these articles is at your own risk and does not form an attorney-client relationship.  Articles are not updated for developments occurring after the article is written.

By Dirk Bartram
October 17, 2017

Thinking about expanding your business out of state?  Do you already have out-of-state customers or clients and wonder what issues lurk?  Read on if you answered yes to either of these questions.

This article explains the following issues you need to manage when doing out-of-state business:

  • Whether your company can legally do its business in another state.
  • Whether your company can use its name in another state.

This article covers issues that apply to all businesses. However, issues that apply only to a specific type of business or industry are beyond the scope of this article.

Here’s a brief explanation of terminology used in this article.  The word (i) “company” means a for-profit corporation or an LLC; (ii) “foreign state” means a state other than the one in which your company was formed.  For instance, Oregon would be a foreign state to your Washington company; (iii) “foreign company” means a company formed in another state or country.  For example, your Washington corporation would be a “foreign corporation” to the State of California.

Can my company legally do business in another state?

The general rule is yes–your existing Washington for-profit corporation or LLC will be eligible to do its business in the other state.  However, there are limited exceptions to the rule.  For instance, California doesn’t allow LLCs to render many types of professional services, such as law and accounting, though they may be rendered by a professional corporation.  Be sure to verify that no exception to the general rule applies to your company.

Even if your company is eligible to conduct activities in another state, it still must qualify to conduct those activities if they constitute “doing business.” Qualification procedures vary from state to state. Most states require a foreign company seeking qualification to file paperwork before doing business in the state and every year thereafter.  The paperwork will often require disclosure of the names of its officers and directors and other basic information.  Also, qualification usually requires the company to pay fees every year (typically $100-$300), to appoint an agent with an office in that state to receive service of process for the company, and to follow certain rules and regulations.

So what activities constitute “doing business” that require qualification in the foreign state? The term is not specifically defined. However, there are activities that states almost always consider to be “doing business” within their borders. For instance, the Oregon Secretary of State’s website (as of the date this article was written) lists the following activities, conducted in Oregon, as “doing business” in Oregon:

  • Maintaining an office.
  • Maintaining a place of business, other than an office, where affairs of the corporation are regularly conducted.
  • Having employees or representatives provide services, such as accounting or personal services, to customers as the primary business activity.
  • Having employees or representatives provide services incidental to the sale of tangible or intangible personal property, such as installation, inspection, maintenance, warranty, or repair of a product.
  • Having an economic presence through which the taxpayer regularly takes advantage of Oregon’s economy to produce income.
  • A stock of goods.

Most other states would agree with Oregon that the activities above constitute doing business in their states, and thus require qualification.

Oregon also lists activities that do not constitute doing business and thus do not, without more, require qualification.  Many other states take the same position:

  • Maintaining, defending or settling any proceeding.
  • Holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs.
  • Maintaining bank accounts.
  • Selling through independent contractors.
  • Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts.
  • Owning without more real or personal property.
  • Conducting an isolated transaction that is completed within 30 days and is not one in the course of repeated transactions of a like nature.
  • Transacting business in interstate commerce.

So what are the penalties if your company fails to qualify in a foreign state when required?  In all or nearly all states, your company would be barred from bringing a lawsuit in that state’s courts.  Your company would be barred, for instance, from suing a business in the foreign state’s courts for breach of its contract with you or for supplying a defective product or service to your company.  In many cases, a foreign company can remove the bar to sue by qualifying to do business any time before the suit, after paying all unpaid registration fees and penalties. In some states, the penalties for failing to qualify when required can be substantial, especially if the failure to qualify persists for a significant period of time.

Some states also penalize the individual acting on behalf of a corporation that was required to qualify but didn’t. For instance, California statute provides that any person who transacts business on behalf of an unqualified foreign corporation that was required to qualify, knowing that it wasn’t qualified, is guilty of a misdemeanor.

For many companies, the consequences of failing to qualify in a foreign state outweigh any potential advantages of not filing, so they qualify in the foreign state when in doubt as to whether it’s required. However, qualifying to do business might, in some states, bolster the argument that the company can be required to collect and/or pay tax to the state.  If you have doubts about whether your company should qualify in a foreign state, contact a business attorney familiar with representing multi-state businesses.

Can my company use its name in other states?

This question actually comprises two questions: (1) can my company qualify to do business using its company name;  and (2) can my company use its company name as its trademark?

In most states, a Washington company can qualify to do business under its company name if it’s “distinguishable on the record” from all company names already registered with that state. The states impose the requirement to insure there won’t be two or more companies with identical names filing with state agencies, thus causing confusion within the agencies. It usually doesn’t take much to meet the “distinguishable” standard.  For instance, say your company name is Ornery Bikes Corp., and an Ornery Cycles Corp. is already on file with the foreign state. In many states, the names would be distinguishable since the primary parts of the names, “Ornery Bikes” and “Ornery Cycles”, can be distinguished by their spellings.

If your company applies to qualify in a foreign state, the state will inform it whether it’s company name is distinguishable on the record and thus available for qualification. If your company’s name is not distinguishable, your company will be required to do business in the state under a distinguishable name. After qualification is complete, your company will be issued a foreign qualification certificate showing the name under which the company qualified (call it the “qualification name”). The company will be required to use the qualification name for filing with state agencies, and should be included when the company signs contracts in the state.

However, even if your company is allowed to use its company name for qualification, that doesn’t mean it can use its company name as a trademark. As explained above, a purpose of assigning a qualification name is to avoid confusion at state agencies.  A trademark, on the other hand, must avoid confusion of the purchasing public.  A trademark serves the purpose of identifying to actual and potential customers the source of the goods or services the company offers. Trademarks are used on websites, store signage and displays, advertising, and products and their packaging and tags. If trademarks are confusingly similar, there is the potential for confusion in the markets for goods and services.

Your company should not use its name as a trademark in another state if a business is already using a confusingly similar trademark there, unless your company has priority under a federal trademark registration. The confusingly similar standard was developed to prevent confusion among customers as to who is providing the goods or services. Many factors are considered when deciding if trademarks are confusingly similar, such as whether they are used for the same or related products or services, and whether the two names are similar in sight, sound or meaning.

The confusing similarity standard for trademarks is usually harder to meet than the distinguishable standard for qualification names. For example, though “Ornery Bikes Corp.” is distinguishable on the record from “Ornery Cycles Corp.”, the two names are confusingly similar assuming the products or services offered by the two businesses are the same or related.  The reason:  the two names are very similar in sound and appearance, and have the same meaning. Contact an attorney with appreciable trademark experience if you have questions about using your trademark in a foreign state.

We’re happy to help if you have questions about your multi-state business.  Give us a call at 206 624 4788.