Non-Compete Agreements: What Hashish Enterprise House owners Must Know About Washington’s New Regulation

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Because the cannabis trade has matured, the competitors between companies has elevated exponentially whether or not engaged within the sale of leisure marijuana, hemp, or CBD. A major threat for any ongoing or new enterprise arises on the finish of a time period of employment, whether or not that finish is voluntary or involuntary. That threat is of a former worker beginning a enterprise that straight competes with your small business, utilizing information and expertise she acquired in your make use of. Relying on the state during which your small business operates, you might use a non-compete agreements (NCA) to mitigate that threat. Every state’s legal guidelines fastidiously circumscribe the scope of an NCA. (In some states NCAs should not enforceable in any respect.) Usually, legislatures and courts frown upon NCAs as a result of they limit an individual’s potential to interact within the livelihood their selecting. So NCAs should be fastidiously drafted to be enforceable — some states allow courts to reform NCAs underneath the “blue pencil” doctrine whereas others states apply the “pink pencil” doctrine, referred to as the all or nothing rule.

Simply final month Washington enacted a brand new regulation that radically adjustments the panorama for non-compete agreements. The invoice was signed into regulation by Governer Jay Inslee on Might eight and takes impact as of January 1, 2020.

Earlier than moving into the substance of the brand new regulation, let’s handle why you would possibly wish to make use of NCAs in your cannabis enterprise. There are a number of causes:

  • Your workers have entry to confidential, proprietary, or commerce secret info. An enforceable NCA can forestall former workers from utilizing such info of their subsequent enterprise. (See right here for a dialogue on using cannabis non-disclosure agreements, right here for a dialogue on cannabis commerce secrets and techniques, right here for dialogue on cannabis patents, and right here for a dialogue about cannabis emblems).
  • It’s possible you’ll promote your organization in some unspecified time in the future sooner or later. Enforceable NCAs could improve the worth of your organization by defending key buyer relationships. NCAs do that by stopping workers from leaving the corporate upon its sale and taking these clients and enterprise relationships with them to a brand new enterprise.
  • Your willingness to share firm secrets and techniques and shield your funding in coaching. Coaching workers is dear, so is the likelihood that an worker could go away having discovered key processes or info that they’ll use in a brand new enterprise. An enforceable NCA can mitigate this expense and threat and should improve your willingness to share info with key workers resulting in further innovation or productiveness.
  • You set expectations for workers and the implications for future litigation. Workers topic to an enforceable NCA are much less prone to imagine they’ll merely leap ship to a brand new firm that competes in your trade. That is very true the place the NCA offers for injunctive aid and liquidated damages.
  • You set rivals on discover. Opponents are much less prone to rent an individual topic to an NCA and should be cautious to not intrude with the NCE much less they discover themselves in court docket on a declare of tortious interference with contract.

With that, lets check out the highlights of Washington’s new regulation, and its extreme restrictions on using NCAs:

  • The regulation defines a non-compete settlement as any written or oral settlement that prohibits an worker or impartial contractor from “partaking in a lawful occupation, commerce, or enterprise of any form”;
  • The regulation creates a rebuttable presumption that any NCA longer than 18 months is unreasonable and unenforceable. A celebration in search of an extended NCA should show by clear and convincing proof {that a} period longer than 18 months is important to guard the celebration’s enterprise or goodwill.
  • It renders void and unenforceable an NCA towards workers who earn lower than $100,000 per yr or $250,000 per yr within the case of an impartial contractor. (Seattle’s tech giants lobbied for this threshold as it could not apply to a lot of their workers).
  • The employer should disclose the phrases of the NCA in writing “no later” than the time of the acceptance of the provide of employment. So disclose the NCA when making the provide of employment, or earlier. If the settlement is entered into later, it should be supported by impartial consideration.
  • For workers who’re terminated by a layoff, an NCA just isn’t enforceable until the worker is compensated for the interval of enforcement minus compensation in any other case earned by the worker through the interval of enforcement. These quantities are topic to an annual inflation adjustment.
  • By definition, an NCA doesn’t embody (1) a nonsolicitation settlement with respect to workers or clients of the employer; (2) a confidentiality settlement; (3) a covenant prohibiting use or disclosure of commerce secrets and techniques or innovations; (4) a covenant entered into by an individual buying or promoting the goodwill of a enterprise or in any other case buying or disposing of an possession curiosity; or (5) a covenant entered into by a franchisee when the franchise sale complies with relevant Washington regulation.
  • Individuals who imagine they’re topic to an NCA in violation of the brand new statute could convey a reason for motion (or the Lawyer Basic could). If a violation is discovered, the violator should pay the upper of precise damages or a statutory penalty of $5,000 plus lawyer’s charges and associated prices and bills.

The regulation turns into efficient as of January 1, 2020. However by its phrases, it applies to all proceedings commenced on or after January 1, 2020, no matter when the reason for motion arose. Because of this, to some extent, the regulation applies retroactively.

The retroactivity provision of the regulation is vital. It signifies that cannabis employers who try to implement an present NCA that doesn’t adjust to the brand new regulation could also be topic to penalties. Though this provision could also be topic to sure constitutional challenges regarding the impairment of contracts, cannabis companies ought to strongly think about revising any present NCAs to adjust to the brand new regulation, together with complying with the provisions regarding new consideration.

Does all this imply that you just shouldn’t hassle with an NCA within the Washington? No, an NCA can stay a useful gizmo in the correct state of affairs. But it surely does imply that you might want to watch out in drafting NCAs to make sure that your NCA complies with the brand new regulation. In any other case you might end up paying statutory fines and plaintiff’s lawyer’s charges.

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