Oregon Noncompetition Agreements - Important Considerations

Oregon non-competition agreements are agreements in which employees promise not to engage in certain competitive activities in exchange for benefits associated with working for an employer. The practical effects of non-competes vary widely based on industry, type of employee, and - perhaps most important - the values of a given employer. Some employers are adamant about protecting their interests with rigid and vigorously enforced non-competes, while many other employers refuse to impose non-competes on their employees for a variety of reasons ranging from cost benefit analysis to basic respect for an employee's right to work. 

In Oregon, non-competes are not void per se like they are in California (See, California Bus. & Prof. Code § 16600). Oregon courts will enforce non-competes that meet statutory and common law requirements and are not defective for any other reason. It is important to note, however, that specific terms of a given non-competition agreement are usually not the end of a comprehensive analysis of competition-related rights, obligations, and remedies. Where non-competition agreements exist - enforceable or not - there are usually other statutory, contractual, and common law duties that must be carefully evaluated. Additionally, there are a variety of practical concerns beyond the black letter law that can be outcome determinative regardless of how the law will apply. For more reading, click here.

While this article strives to provide a general overview of some important considerations related to Oregon non-competes, it is not comprehensive by any means. I strongly recommend that any individual or business facing a non-compete seek counsel from a qualified attorney. Non-competes in both transactional and disputed contexts are highly intricate and complex matters.

Competing Concerns

Employers that rely on non-compete agreements usually cite a need to protect proprietary business information as a basis for imposing such agreements. The logic is straightforward: employers do not want to recruit, train, and expose employees to their proprietary know-how only to have those employees leave to work for a competitor.

On the other hand, non-compete agreements are often adverse to employees because they hinder the employee from earning a living or seeking work in a chosen profession. Employees often feel conflicted when presented with non-compete agreements in connection with a prospective job. Employees are usually excited about prospective jobs and may feel pressured not to question a new employer's onboarding paperwork. On the other hand, employees who consider non-competes are understandably concerned about tying their hands and limiting their options with respect to future employment.

When evaluating a non-compete, it is healthy and important to consider all of the competing concerns that underpin a non-compete. Employees should feel empowered to openly and respectfully discuss non-competes with prospective employers and should seek legal counsel to help formulate an approach to dealing with a non-compete. Employees need to be aware that the law typically does not prevent employers from attempting to impose non-competes and, in most cases, there is little protection for employees who reject valid non-competes or attempt to negotiate them in a manner that turns out to be unsatisfactory to a new employer. 

Employers are well-advised to field employee inquiries concerning non-competes in a respectful manner. While employers certainly have a right to draw clear, legally-compliant boundaries related to employee competition, remaining reasonable and responsive to employee concerns minimizes the likelihood of needless disputes.

Third Parties

In addition to the direct parties to a non-compete, there are a variety of third parties that should be considered when evaluating a non-compete. The concern is clear: new employers, customers, business partners, and entities involved in purchases, mergers, and acquisitions risk significant liability if they are not mindful of existing competition-related agreements. Even if these third parties are not direct parties to a non-compete, common law duties such as the duty to not interfere with contractual obligations may prevent third parties from working with employees who are subject to a non-compete as a practical matter.

Perhaps the most common third party to non-compete disputes is the new or prospective employer. Employers often require new employees to represent and warrant that they are not subject to competitive restrictions from past employers or other businesses that might hinder their ability to work. Likewise, non-compete agreements increasingly require former employees to notify former employers of new job prospects, regardless of whether the prospective work is competitive in nature. By imposing these requirements on employees, employers maintain control and secure a preemptive advantage in addressing competitive concerns before the cat gets out of the bag.

Customers are another third party that often has a vested interest in how non-compete agreements are applied. Consider the case of a physician that leaves one clinic to work for another clinic in the same practice area. Imagine how the physician's former patients could be affected by a non-compete preventing their doctor from providing medical care. See, e.g., Pacific Kidney & Hypertension, LLC v. Kassakian, 156 F. Supp. 3d 1219 (D. Or. 2016). While this example provides a stark example of how third parties can be affected by non-competes, the concern is not limited to the medical profession and it routinely plays out in a variety of contexts and industries. The third party dilemma can present itself any time a customer grows to rely on a particular employee who is subject to a non-compete.

Other third parties to consider include business partners in a new venture. For example, if an employee subject to a non-compete wishes to engage in a new business venture in a competitive field, the existence of a non-compete can create serious consequences not only for the employee but for the employee's new business partners, investors, etc. as well. 

Finally, there are a variety of complicated legal questions that arise when an employer is acquired, purchased, or merged with another legal entity. As a general matter, in Oregon, an acquirer or purchaser of a business with non-competes in place with existing employees will assume the benefits of those non-competes after acquiring the business. A more complicated situation arises when an acquirer or purchaser takes control of a business that had not previously imposed non-competes and subsequently tries to impose them.

Oregon's Non-Compete Statute - ORS 653.295

Oregon's general statute governing employment-related non-competes is ORS 653.295.  This statute places certain limitations on non-competition agreements and makes non-compliant agreements voidable (not to be confused with void). Anyone dealing with a non-compete should read this statute. Also, remember that court opinions, which are not covered exhaustively in this article, can impact on how this statute is applied. 

ORS 653.295 only applies to non-competes entered into between an employer and employee. The terms "employee" and "employer" are defined in ORS 652.310. The term "employer" is broad and generally includes anyone, whether individual or legal entity, who "engages personal services of one or more employees" ORS 652.310(1). The term "employee" is also broad. However, ORS 652.310 provides specific carve-outs for partners and independent contractors. Another interesting detail is found in ORS 652.310(2)(b), which excludes from the definition of "employee" certain employees who render services only partially in Oregon. This provision means that some remote employees may not be able to reap the benefits of ORS 653.295, even if Oregon's laws are otherwise applicable to the employment relationship. 

One key feature of Oregon's non-compete statute is a limitation on the length of non-competes. As of the date this article was last updated, non-competes subject to Oregon law may not exceed 18 months from the date of an employee's termination and the remainder of any term in excess of that time may not be enforced by courts of the state.

The other key feature of Oregon's non-compete statute is a series of prerequisites for an enforceable agreement. Agreements that do not meet the statutory requirements are voidable and may not be enforced by Oregon courts. The four requirements for an enforceable non-compete under ORS 653.295 are as follows:

(a) Notice. Employers must inform employees 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. Alternatively, an employer may impose a non-compete upon a subsequent bona fide advancement of the employee. A bona fide advancement ordinarily includes new, more responsible duties, different reporting relationships, a change in title and higher pay.

(b) Exempt Status.  Only "exempt" employees, as defined in ORS 653.020(3), can be subjected to non-compete agreements. ORS 653.020(3) refers to individuals who fall under what is commonly known as a "white collar exemption" - that is: administrative, executive or professional employees who perform predominantly intellectual, managerial or creative tasks, exercise discretion and independent judgment, and are paid on a salary basis.

(c) Protectable Interest. An employer must have a protectable interest in order to impose an enforceable non-compete. For the purpose of ORS 653.295, an employer has a "protectable interest" when the employee has access to trade secrets, competitively sensitive confidential business or professional information, or is employed as on-air talent by an employer in the broadcasting business. Given the broad definition, many employers are able to establish a protectable interest and challenges by employees on this basis tend to be  an uncertain and risky means of challenging a non-compete.

(d) Income Requirement. Employees must, at the time of their termination, earn an annual gross salary and commissions in excess of the median family income for a four-person family as determined by the United States Census Bureau for the most recent year available at the time of the employee's termination. Determining an exact figure for this salary requirement is surprisingly difficult given the lack of a clear Census Bureau data point. However, depending on which census data one reviews (courts of binding jurisdiction have not specified which census data applies), the number can range from $70,000 to over $90,000 per year.

ORS 653.295 provides a number of exceptions and carve-outs. First, the length restrictions and enforceability prerequisites contained in ORS 653.295(1) and (2) only apply "to noncompetition agreements made in the context of an employment relationship or contract and not otherwise." The practical implication of this carve-out is not particularly clear and, for better or worse, there are few appellate court decisions interpreting this language. It remains unclear exactly how courts are required to deal with situations such as non-competes contained in employee severance agreements or cases where non-competes between employees and employers are made outside the immediate context of an employment relationship/contract, as often happens where employees do tangental side work for an employer.

Another key carve-out from ORS 653.295 is for non-competes that are tethered to bonus restriction agreements. ORS 653.295(4)(a). The definition of a bonus restriction agreement and relevant limitations for imposing an enforceable noncompete in the context of a bonus restriction agreement are spelled out in detail in ORS 653.295(7)(a). ORS 653.295(4)(b) also creates an exemption for "covenant[s] not to solicit employees of the employer or solicit or transact business with customers of the employer." ORS 653.295(4)(b). This subsection means that non-solicitation agreements and agreements not to transact business with an employer's customers are not subject to the time limitations and prerequisites of ORS 653.295(1) and (2).

ORS 653.295(5) ensures that employers are permitted "to protect trade secrets or other proprietary information by injunction or any other lawful means under other applicable laws." The practical effect of this subsection is that it allows employers to pursue actions for trade secret misappropriation and enforce other restrictive covenants and statutory, contractual, or common law principles aimed at protecting an employer's proprietary information even if a non-compete is voidable under ORS 653.295.

Finally, even if an employer does not meet the exempt employee and salary requirements described above, ORS 653.295(6) allows a court to enforce a noncompetition agreement where an employer compensates the employee during the restricted period in an amount equal to the greater of: (1) 50% of the employee’s annual gross base salary and commissions at the time of the employee’s termination, or (2) 50% of the median family income for a four-person family as determined by the most recent U.S. Census Bureau at the time of the employee’s termination. ORS 653.295(6).


Common Law Limitations on Non-Competes

In addition to Oregon's general non-compete statute, non-competes are also subject to common law requirements for contracts that restrain trade. The basic common law test for determining whether a contract in restraint of trade is valid looks at whether the contract is: (1) “partial or restricted” in scope and extent, (2) based on good consideration, and (3) reasonable. These common law requirements have evolved in Oregon appellate cases interpreting the statutory maxim that "[e]very contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce is declared to be illegal." ORS 646.725.

Non-competes that fail to describe prohibited post-employment activities with sufficient particularity and specificity are at risk of failing the first element of the common law test. Likewise, non-competes that prohibit more conduct than reasonably necessary to protect an employer's interests may be deemed unreasonable and unenforceable. Geographic and time restrictions must be reasonable given the particular circumstances of each case. The test for reasonableness is whether the temporal and geographic scope of a non-compete is tailored to what is necessary to protect an employer's legitimate protectable interests. Both of these considerations depend heavily on the nature of an employer's business. If a non-compete provides no geographical or time limitations, Oregon courts may (but are not necessarily required to) insert reasonable limitations based on the facts and circumstances of the particular case.

The second element of the common law test is a matter of basic contract law. Non-competes must be supported by consideration - that is, a payment, benefit or reward. If an employer fails to provide consideration in exchange for a non-compete, it may be unenforceable. In the context of an employment relationship, this element is usually satisfied by an employer allowing an employee to work and earn wages, benefits, and experience. Many non-competes contain express recitals confirming that the employer's agreement to employ the employee and provide the employee access to the employer's business information is conditioned upon the employee agreeing to a non-compete. The purpose of these recitals is to ensure there is no ambiguity about valid consideration.

The final element in the common law test for non-compete agreements is a reasonableness balancing test. The reasonableness test involves two prongs. First, the terms of the non-compete may not be broader than necessary to protect the employer's interest. This prong overlaps with the first element for a valid restraint of trade ("partial or restricted" scope). Second, the hardship to an employee and the likely injury to the public cannot outweigh an employer's need for a non-compete.

The first prong requires a close look at an employer's interests. As a threshold matter, an employer must actually have a protectable interest, such as confidential information. For example, knowledge of product launch dates, product allocation strategies, new product development, product orders six months in advance and strategic sales plans have all been deemed protectable interests where such information is not general knowledge in the industry. Business goodwill may also constitute a protectable interest depending on the nature of an employer's business.  The second prong involves an examination of the hardship and potential injury to the employee and the public and a comparison of those potential hardships and injuries with the employer's interests. Recent case law indicates that in many situations, the potential hardship and injury to the employee and public must be grave in order to outweigh an employer's interest. See, e.g., Pacific Kidney & Hypertension, LLC v. Kassakian, supra.

Related Restrictive Covenants

Under Oregon statute, a "non-compete" is defined as "an agreement, written or oral, express or implied, between an employer and employee under which the employee agrees that the employee, either alone or as an employee of another person, will not compete with the employer in providing products, processes or services that are similar to the employer’s products, processes or services for a period of time or within a specified geographic area after termination of employment." ORS 653.295(7)(d).

Determining whether a given agreement is actually a "non-compete" or something different often requires a detailed analysis. For example, consider the case of "non-solicitation" agreements, as mentioned above, which prohibit employees from poaching or attempting to poach customers, employees or other business contacts. While on the one hand, these agreements may prevent an employee from competing with an employer, a non-solicitation agreement does not prohibit, per se, an employee from providing similar products, processes, or services. They only prohibit employees from certain kinds of solicitory contact.

Other examples of restrictive covenants that may have competitive implications without actually being a "non-compete" under Oregon law include confidentiality agreements, nondisclosure agreements, proprietary information agreements, and data security policies. Even where these agreements may limit an employee's ability to compete after employment, it should not be assumed they will be interpreted and treated by courts as non-competition agreements.

The distinction between "non-competes" and other competition-related documents is an imminently practical and important concern. ORS 653.295(4)(b) dictates that Oregon's non-compete statutory requirements will not apply to "[a] covenant not to solicit employees of the employer or solicit or transact business with customers of the employer." This means an employer is free to impose properly drafted non-solicitation agreements on employees without meeting any of the requirements of Oregon's non-compete statute. The is true of other agreements that protect proprietary information. See, ORS 653.295(5). 

The takeaway here is that parties must be extremely careful and conservative before concluding that a given agreement is actually a "non-compete." 

Enforcement

Employers that wish to enforce non-competes have an arsenal of procedural tools at their disposal. The most immediate and, often times, most effective tool is the cease and desist letter instructing an employee (and often a new or prospective employer) to immediately stop engaging in competitive activity. The primary benefit to employers - and the threat to employees - of cease and desist letters is that they can implicate new employers, business contacts, and even customers in competitive disputes cheaply and without any court involvement. However, recent Oregon case law suggests that employees who properly address issues regarding unenforceable non-competes before actual competitive disputes arise may have rights against employers that improperly attempt to interfere with subsequent employment or business opportunities by sending or continuing to press forward with unfounded cease and desist-type requests.

Matters that are not resolved informally can proceed to court, where employers typically begin by seeking preliminary injunctive relief. Injunctive relief refers to a variety of court-imposed orders that prevent competitive activity that violates an enforceable non-compete. In Oregon, the most frequently utilized forms of injunctive relief are temporary, preliminary, and permanent restraining orders and injunctions. Without going into the details of these remedial mechanisms, suffice it to say that injunctive relief in non-compete cases is aimed at putting employees engaged in prohibited competitive activities "on the couch." 

In addition to injunctive relief, money damages are a primary consideration in many legal proceedings to enforce non-competes. Money damages, which aim at compensating a party for its losses, can quickly become a complicated legal issue in non-compete cases. Consider the complexity of devising an objective, non-speculative, and evidence-based method to prove relatively ambiguous damages like business goodwill or customer trust. The practical consequence of this complexity is that injunctive relief remains the primary driver in non-compete cases. In many cases, if an employer can obtain preliminary injunctive relief, it becomes questionable whether continued protracted litigation is in anyone's interest. As a result, many non-compete cases resolve after preliminary injunctive matters are concluded.

General and Practical Concerns

Finally, employers and employees must consider an array of other general and practical concerns that arise on a case-by-case basis in non-compete matters. Without listing or delving into the details of every possible concern related to non-competes, which is beyond the scope of this article and impossible to do in the abstract, it is important to acknowledge that seemingly mundane details in any non-compete can have profound implications in any non-compete matter.

Consider a few examples:

Choice of Law, Venue, and Forum.
Parties to a contract are generally free to stipulate to apply the laws of a particular state in disputes that arise under an agreement. In some cases, statutes may supersede choice of law clauses. See ORS 15.320(3) (Oregon law applies to "[a] contract of employment for services to be rendered primarily in Oregon by a resident of Oregon."). The analysis can become complicated, however, where choice of law clauses implicate competing interests of multiple jurisdictions. Regardless of the outcome, the important point is the amount of uncertainty and related cost and risk that boilerplate language creates where the rubber meets the road. In addition to choice of law clauses, non-competes often contain venue (i.e., physical location) and forum (i.e., which court - state, federal, or otherwise) clauses that can have similarly important effects on how a given matter will be addressed.

Attorney Fees. Many non-competes contain language entitling a prevailing party in a dispute to recover reasonable attorney fees from the losing party. For many employees and smaller businesses, these provisions create an intolerable amount of risk that makes it all but impossible to engage in a legal confrontation. Legal fees - even without a fee-shifting clause - often becomes a proverbial "tail that wags the dog" in non-compete disputes.

Indemnification and Hold Harmless Agreements.
Indemnification and hold harmless agreements are agreements under which one party agrees to pay damages and/or defense costs of another party in the event of a legal dispute. While these clauses sometimes exist in non-competes, the more frequent issue is whether and to what extent a new or prospective employer will be willing and able to cover an employee's legal fees and damages in the event a former employer attempts to enforce a non-compete. The mechanics of these agreements can be deal breakers for employees and businesses alike and should be considered proactively before disputes arise.

Blue Pencil Clauses. Blue pencil clauses refer to terms in a non-compete that allow a court to modify or strike any provisions of a non-compete that do not comply with the law or are otherwise unenforceable. On the one hand, these clauses may be useful to ensure that an employer's interests remain protected even if a specific provision in an agreement is overly broad or if the law changes and prevents enforcement for some reason. On the other hand, blue pencil clauses can be problematic - as some courts have observed - because they encourage employers to impose overly broad non-competes and leave revision to courts.

Interests and Privileges. Finally, parties to non-competes must thoroughly inventory their friends and foes, both currently and as those roles might change in the future. For example, an employer seeking to hire an employee with a non-compete with a former employer may at first have interests that are aligned with the employee. However, if the employee's former employer later seeks to enforce the non-compete, those interests can and often do diverge. The employee may want and need to continue working for the new employer while, conversely, it might be in the new employer's interest to distance itself from the employee due to the costs and liability exposure associated with a non-compete dispute. This alignment and misalignment of interests can also manifest in the context of privileges - that is, what can parties involved in a dispute communicate and reveal to one another under legal protection from having to divulge the communications to the other side.

Seeking Legal Advice

If you are involved in a matter relating to an Oregon non-compete, I strongly recommend that you consult with an experienced Oregon attorney.

Category: Restrictive Covenants