Employers Must Use Caution When Implementing Noncompetition Agreements

by Michael C. Petersen

Spring 2001

Many employers require their employees to sign noncompetition agreements. Such agreements help employers keep customers and proprietary information when employees leave. However, a recent case from the Oregon Court of Appeals demonstrates that employers must use caution when implementing noncompetition agreements.

To be valid, noncompetition agreements must satisfy several elements. First, Oregon Revised Statute 653.295 provides that they must be entered into upon an employee's initial employment or upon an employee's bona fide advancement in employment. Second, the agreement must be limited in duration and geographic scope. Finally, the employer must possess a legitimate protectible interest, which generally consists of proprietary information or valuable customer contacts. As a general proposition, courts scrutinize noncompetition agreements closely so that employees are not unfairly denied employment opportunities.

In the recent case of Dymock v. Norwest Safety Protective Equipment for Oregon Industry, Inc. , 172 Or App 399 (2001), the employer, Norwest, ordered the employee, Dymock, to sign an agreement that restricted, but did not bar, his ability to compete with Norwest. The agreement prohibited Dymock from soliciting Norwest's customers, targets of its marketing, and its employees while Dymock was employed with Norwest and for a period of five years after his employment ended. Norwest had employed Dymock for 17 years at the time it presented him with the agreement. Dymock refused to sign it, and Norwest fired him.

Dymock sued Norwest for wrongful discharge and sought damages for economic losses and emotional damages. Dymock contended that the agreement was a noncompetition agreement and that Norwest could not force him to sign it except upon initial employment or a bona fide advancement, which had not occurred. Norwest contended that the agreement was not a noncompetition agreement, because it did not completely bar Dymock from competing with it. The court agreed with Norwest and dismissed Dymock's complaint.

The court of appeals reversed the trial court and concluded that Dymock could pursue his lawsuit against Norwest for wrongful discharge. The court first concluded that the agreement was, in fact, a noncompetition agreement for purposes of Oregon Revised Statute 653.295. The court reasoned an agreement may be a noncompetition agreement even when it does not completely bar competition. The court stated that an agreement is a noncompetition agreement when it materially deters or impairs an employee from competing with the employer. Finally, the court concluded that Dymock had a claim for wrongful discharge, because Norwest fired him for pursuing an important employment-related right.

The Dymock case presents several lessons for Oregon employers. Employers must closely scrutinize all restrictive agreements before requiring employees to sign them. Under Dymock , agreements that permit employees to compete, but prohibit them from soliciting customers or employees may constitute noncompetition agreements.

The Dymock case further demonstrates that it is crucial for employers to present employees with such agreements upon their initial employment or upon a bona fide advance in employment. Oregon case law suggests that execution of such an agreement within three days of hire or promotion is sufficient. However, employers should not take the chance of waiting that long. Instead, employers should present employees with such agreements on the day of hire or promotion.

Noncompetition agreements remain an important tool for employers. However, the Dymock case shows that employers must use caution when presenting them to employees. Failure to follow the legal requirements may result in unenforceable agreements, or worse-legal liability.