Oregon Noncompetes - An Overview

This article discusses Oregon laws about noncompete agreements with a focus on practical considerations.

I represent employees and employers with noncompetes throughout Oregon on a 100% remote basis. The best first step for involving an attorney with a noncompete is usually an initial review and consideration of documents and a consultation to discuss. I can usually complete this initial step for under a couple hours of attorney time. Please feel free to contact me (email is best: joel@worklaw.io) if you need help.

ORS 653.295 - Oregon's Employment-Related Noncompete Statute

ORS 653.295 is Oregon's general statute governing noncompetes in the employment context and only applies to agreements entered into between an employer and employee. See ORS 653.295(3) (specifying applicability "only to noncompetition agreements made in the context of an employment relationship or contract and not otherwise.").

ORS 653.295 limits noncompete agreements and makes non-compliant agreements "voidable" and unenforceable by courts in this state. The distinction between "void" and "voidable" is important. In practice, it means in some cases, that employees may be required to proactively void non-compliant agreements in order to trigger certain legal protections. See e.g., Brinton Business Ventures v. Searle, Case No. 3:2016-cv-02279 (D. Or. 2017) at p. 9 ("The plaintiff had to show not only that the agreement was voidable but that she had actually taken steps to void it" citing Bernard v. S.B., Inc., 270 Or. App. 710, 716, rev. den., 358 Or. 69 (2015)).

ORS 653.295 does not usually apply to other restrictions such as nonsolicitation agreements, agreements not to transact business with customers, confidentiality agreements, or proprietary information agreements. See e.g., ORS 653.295(4)(b) ("Subsections (1) and (2) of this section do not apply to ... [a] covenant not to solicit employees of the employer or solicit or transact business with customers of the employer.").

A key feature of Oregon's non-compete statute is a limit 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. ORS 653.295(2) ("The term of a noncompetition agreement may not exceed 18 months from the date of the employee’s termination. The remainder of a term of a noncompetition agreement in excess of 18 months is voidable and may not be enforced by a court of this state.")

The other 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 requirements for an enforceable non-compete under ORS 653.295 are as follows:

1. 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. ORS 653.295(1)(a). A bona fide advancement ordinarily includes one or more of the following factors: additional responsibility or duties, different reporting relationships, change in title, and higher pay.

2. Exempt Status


Only certain "exempt" employees, as defined in ORS 653.020(3), can be subjected to non-compete agreements. More specifically, ORS 653.020(3) refers to individuals who fall under 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. Id.

3. 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 this 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.

4. 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 may range from $70,000 to over $90,000 per year.

5. Post-Termination Notice.

Effective January 20, 2020, HB 2992 will require employers, "[w]ithin 30 days after the date of the termination of the employee’s employment, [to] provid[e] a signed, written copy of the terms of the noncompetition agreement to the employee."

Carveouts


ORS 653.295 provides a number of exceptions and carveouts to these prerequisites.

First, as noted above, the restrictions 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." This can be an important issue for alternate work arrangements, such as independent contractor and business service agreements. It also remains unclear exactly how courts are required to deal with situations such as noncompetes in employee severance agreements where a noncompete is offered as term of a post-employment waiver of claims.

Another carve-out from ORS 653.295(1) and (2) is for non-competes that are tethered to bonus restriction agreements. ORS 653.295(4)(a). The definition of a bonus restriction agreement and the conditions for imposing an enforceable noncompete in the context of a bonus restriction agreement are described in ORS 653.295(7)(a).

There is also 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).

Oregon Common Law Restrictions on Noncompetes

In addition to Oregon's general noncompete statute, noncompetes 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. See Nike, Inc. v. McCarthy, 379 F. 3d 576, 584 (9th Cir. 2004) citing Eldridge v. Johnston, 195 Or. 379, 245 P.2d 239, 250 (1952). 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.

1.   Partial or Restricted

Noncompetes 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, noncompetes that prohibit more conduct than reasonably necessary to protect an employer's interests may be either partially or completely unenforceable. Geographic and time restrictions must be reasonable given the particular circumstances of each case. The test for reasonableness is whether the time and geographic scope of a non-compete is tailored to what is necessary to protect an employer's legitimate protectable interests. The employer's interests are also balanced against the policy favoring an employee's right to earn a living.

These considerations depend heavily on both the nature of an employer's business and the particular employment relationship. If a noncompete 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.

2.   Consideration

The second element of the common law test is a matter of basic contract law. Noncompetes must be supported by consideration - that is, a payment, benefit or reward. If an employer fails to provide consideration in exchange for a noncompete, 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 noncompetes contain express recitals confirming 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.

3.   Reasonableness Balancing Test

The final element in the common law test for noncompete agreements is a reasonableness balancing test. The reasonableness test involves two prongs. First, the terms of the noncompete 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., Pac. Kidney & Hypertension, LLC v. Kassakian, 156 F Supp 3d 1219, 1222 (D. Or. 2016).

Oregon Contract Law As Applied to Noncompetes

Oregon law defines a noncompetition agreement 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).

1.   Is the Agreement is a Noncompete?

Determining whether a given agreement is actually a noncompetion agreement will depend on the contract's language. For example, consider nonsolicitation agreements. Depending on the particular agreement, some nonsolicitation agreements merely limit an employee from actively pursuing a former employer's customers. Other nonsolication agreements, however, go well beyond just the active pursuit of former customers.

For example, in the case of Naegeli Reporting Corp. v. Petersen, the employees at issue signed a nonsolicitation agreement under which they agreed to “not, Directly or Indirectly solicit, divert, or appropriate (or attempt to solicit, divert, or appropriate) ... any person or entity that was a customer or prospective customer of [plaintiff] during such non-solicitation period.” 3:11-1138-HA, 2011 WL 11785484, at *2 (D. Or. Dec 5, 2011). The Court in Petersen held that including prospective customers in the definition of the restricted activity made it "much broader" than just a nonsolication agreement and on that basis refused to enforce the agreement. Id.

Other examples of restrictive contractual agreements that may have competitive implications without actually being a "noncompete" under Oregon law include confidentiality agreements, nondisclosure agreements, proprietary information agreements, and data security policies. However, even where these agreements may limit an employee's ability to compete after employment, one should not assume they will be interpreted and treated as noncompetition agreements.

2.   What Are the Noncompete's Terms?

This should go without saying, but the actual language of a noncompete is crucial. A noncompete should describe, in detail, the specific conduct prohibited. Most noncompetes will also set forth other specific terms, such as remedies, tolling provisions (i.e., the restricted period does not run while the employee is in violation).

Employees who are either considering or have signed a noncompetition agreement should closely review the terms of a noncompete to make sure they understand exactly what is prohibited and what is allowed. Even if a noncompetition agreement ends up being voidable, the existence of a signed noncompetition can create significant risk, cost, and stress. Consulting with a lawyer at the earliest possible stage is often a wise investment.

One final note about the terms of a noncompete. A certain subset of employers impose noncompete with very broad, sweeping, and aggressive terms. In my experience, this most frequently occurs among smaller employers that either use generic template documents (frequently ones found on the internet) or rely on attorneys who have not studied the nuances of Oregon employment contracts. While these aggressive contracts may have some advantages in some cases, my experience is that reputable employers tend to use noncompetes that are specific, narrowly tailored to serve a specific business need, and, ultimately, are fair and compassionate to the employee.