Oregon Noncompetes - An Overview

This article details Oregon's employment-related noncompete statute, ORS 653.295, and related cases with links to original source material.

PLEASE NOTE: The Oregon Legislature amended ORS 653.295 in Senate Bill 169 that goes into effect for all agreements entered into on or after January 1, 2022. This article does not address the details of this new bill, which I was involved in drafting and passing through the legislature.

Overall, SB 169 is almost entirely favorable to employees! 🎉 Namely, it makes non-compliant agreements "void" instead of "voidable." (a fact that defense lawyer articles in Oregon have glossed over in their summaries to date). Employers that attempt to enforce void noncompete agreements may be subject to civil liability in certain cases.

The remainder of this article discusses ORS 653.295 prior to SB 169.

I.   Overview

Oregon law regulates employee noncompetes, including an annual pay requirement equal to the median income of a family of four ($100,533 as of 2/15/21 -- the current figure may vary). Employees with "voidable" noncompetes may be permitted to void noncomplying agreements to protect certain legal rights. 

It is important to understand that noncompete agreements overlap with other separate contractual, statutory, and common law obligations such as nondisclosure agreements (NDAs) and nonsolicitation agreements.

II.   ORS 653.295 is Oregon's Employment-Related Noncompete Statute

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

ORS 653.295 regulates noncompete agreements by imposing legal prerequisites on employers who impose them. The statute makes non-compliant agreements "voidable" and unenforceable by Oregon courts.

     A.     Void vs. Voidable

The "voidable" part is important. In practice, it means employees in some cases must take proactive measures to void non-compliant agreements in order to trigger certain legal protections. See e.g., Brinton Bus. Ventures, Inc. v. Searle, 248 F. Supp. 3d 1029, 1034 (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 the agreement."); Bernard v. S.B., Inc., 270 Or. App. 710, 719, 350 P3d 460, 464 (2015), rev. den., 358 Or. 69 (2015)(Oregon law "treat[s] noncompetition agreements—even those that do not strictly comply with the new statutory requirements—as presumptively valid rather than void ab initio.")(emphasis in original).

Oregon lawmakers added "voidable" into the statute in 2007. See Oregon Senate Bill 248 (2007):

     B.     Coverage Limited to "Noncompetition Agreements"

ORS 653.295 does not necessarily apply to other restrictive covenants like nonsolicitation agreements, agreements not to transact business with customers, confidentiality agreements, or proprietary information agreements. See e.g., ORS 653.295(4)(b) (exempting "covenant[s] not to solicit employees of the employer or solicit or transact business with customers of the employer." from noncompete restrictions); But see, Naegeli Reporting Corp. v. Petersen, 3:11-1138-HA, 2011 WL 11785484, at *2 (D. Or. Dec 5, 2011)(construing overly broad nonsolicitation agreement as a noncompetition agreement).

     C.     Length of Noncompetition Agreements

Oregon limits the length of non-competes. Non-competes entered into after January 1, 2016 may not exceed 18 months from the employee's termination. The remainder of any term in excess of that period may not be enforced by courts of the state. ORS 653.295(2). This statute previously contained a two-year limit, which Oregon lawmakers reduced to 18 months for all agreements entered into after 2016.

The prerequisites for an enforceable non-compete under ORS 653.295 are:

          (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. ORS 653.295(1)(a).

Alternatively, an employer may impose a noncompete upon a subsequent bona fide advancement of the employee. Id. A bona fide advancement ordinarily includes one or more of the following factors: meaningfully increased responsibility and duties, different reporting relationships, change in title, and higher pay. See Nike, Inc. v. McCarthy, 379 F. 3d 576, 581 (9th Cir. 2004); First Allmerica Fin. Life Ins. Co. v. Sumner, 212 F. Supp. 2d 1235, 1241 (D. Or. 2002)(requiring "an increase or improvement in job status or responsibilities that justifies a change in the way the employer entrusts client contacts and business related information with the employee. Simply offering the employee more money, a more favorable compensation package or certain benefits is insufficient to constitute a bona fide advancement, absent some proof of a change in actual job status or responsibilities.")

          (2)     Exempt Status

Non-competes are voidable and unenforceable by Oregon courts unless the employee is:

An individual engaged in administrative, executive or professional work who:

(a)  Performs predominantly intellectual, managerial or creative tasks;

(b)  Exercises discretion and independent judgment; and

(c)  Earns a salary and is paid on a salary basis.

ORS 653.295(1)(b); ORS 653.020(3); ORS 653.295(1)(b).

ORS 653.020(3) is the same statute that exempts employers from paying overtime and minimum wage to covered employees. For a closer look at the meaning of "administrative, executive or professional work," see OAR 839-020-0050(1)-(3). Note that OAR 839-020-0050(4) excludes outside sales persons from the definition of "administrative, executive or professional work." Instead, ORS 653.020(6) includes "[a]n individual engaged in the capacity of an outside salesperson" under a separate exempt category.

          (3) Protectable Interest

An employer must have a protectable interest. This means the employee must have 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. ORS 653.295(4)(b).

In practice, employers frequently attempt to establish a protectable interest through an employee's access to business information in various locations and contexts. Modern employees often have broad access to employer information due to increased technology in workplaces. However, if employers provide sweeping systems access to all employees, it raises a question of whether the information to which employees have access is truly "sensitive" or "confidential." (e.g., how confidential is information if an employer provides indiscriminate access and, in some cases, even prevents employees from disconnecting from it?). Employers, employees, and courts will continue to grapple with issues related to protectable interests.

Employers also frequently point to relationships as a protectable interest. The Oregon Court of Appeals has held that relationships may be a protectable interest where "the nature of the contact is such that there is a substantial risk that the employee may be able to divert all or part of the customer’s business.” Volt Services Group v. Adecco Employment Services, 178 Or. App. 121, 126-27, 35 P. 3d 329 (2001), rev. den., 333 Or. 567, 42 P. 3d 1246 (2002). Likewise, regarding nonsolicitation agreements, the Oregon Supreme Court in Kelite Prod., Inc. v. Brandt et al. limited the analysis to employees who are “generally hired and paid a salary in order that they may help build up custom, getting acquainted with customers and acquiring their good will.” 206 Or. 636, 652, 294 P.2d 320 (1956) (internal quotation marks omitted).

Recent cases have demonstrated the limited breadth of an employer's protected interest. For example, the Oregon Court of Appeals in Oregon Psychiatric Partners, LLP v. Henry, 293 Or. App. 471 (2018) declined to protect relationships with inactive customers, explaining:

[I]f [Oregon law] provided an exception for agreements that prohibited soliciting or transacting business with parties with little or no ongoing relationship with the employer, then that exception would allow for agreements that inhibit competition to much the same degree as blanket agreements not to compete

Id. at 477

          (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.

Unfortunately, this number is not as easy to find as one might expect. According to the U.S. Census Bureau, the current (as of this article's "last updated" date above) median income of a family of four in Oregon appears to be $97,311. This number is available by visiting https://data.census.gov/cedsci and searching for report "B19119":

The "Geos" tab at the top allows you to specify "Oregon" which, as of February 2021, provides a figure of $100,533:

          (5) Post-Termination Notice.

Effective January 20, 2020, ORS 653.295(1)(e) requires 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."

     A.     Carveouts

ORS 653.295 provides a number of exceptions and carveouts.

First, as noted above, the restrictions 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 contractors, part owners, and other business contracts.

It also remains unclear exactly how courts address situations such as noncompetes in employee severance agreements where a noncompete is offered as term of a post-employment waiver of claims related to an individual's former employment.

Another carve-out from ORS 653.295(1) and (2) is for noncompetes for bonus restriction agreements. ORS 653.295(4)(a). Bonus restriction agreements 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 exception 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) or (2). But see, Naegeli Reporting Corp. v. Petersen, 3:11-1138-HA, 2011 WL 11785484, at *2 (D. Or. Dec 5, 2011) (construing overly broad nonsolicitation agreement as noncompetition agreement). However, these agreements still must meet the common law requirements for contracts in restraint of trade described in the next section of this article.

ORS 653.295(5) allows employers "to protect trade secrets or other proprietary information by injunction or any other lawful means under other applicable laws." Therefore, even if a noncompete is voidable under ORS 653.295, subsection (5) allows employers to pursue actions for trade secret misappropriation and enforce other restrictive covenants and statutory, contractual, or common law principles protecting an employer's proprietary information.

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 the 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).

In most cases, employers seeking to take advantage of this provision will specify in advance (i.e., in the employee's contract) that they will compensate the employee during the restricted period. In cases where an employer does not specify upfront, the timing and other details of an employer and employee's actions can become critical.

Oregon appellate courts have not yet had occasion to interpret the parameters of the current version of ORS 653.295(6)(the statute was renumbered in 2007, see Oregon Senate Bill 248 (2007)). For example, there are no cases explaining how the law would apply where an employee voids a voidable noncompete and an employer subsequently offers to pay the employee in accordance with ORS 653.295(6) in an attempt to enforce the noncompete.

III. 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 relevant test evaluates whether an agreement 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.

     A.   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 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 noncompete is reasonably tailored to protect an employer's legitimate protectable interests. The employer's interests are also balanced against a 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.

     B.   Consideration

The second element of the common law test is a matter of basic contract law. Restrictive covenants, like any other contractual term, 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 the employee to work and earn wages, benefits, and experience from the employer. Many noncompetes contain express recitals confirming that the employer is employing the employee and providing the employee access to the employer's business information in exchange for the employee's promise not to compete. These recitals help remove any ambiguity about valid consideration.

     C.   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).

IV.    Practical Concerns

     1.   Is an Agreement Actually a Noncompete?

Determining whether a given agreement is actually a noncompete 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.   Notice Requirements

Some noncompetes require an employee to (a) notify the former employer of any new employment so the former employer can assess any contractual implications, and (b) to notify any new employer of the noncompete. The practical effects, enforceability of these terms, and appropriate strategies related to these clauses will vary on a case-by-case basis.

     3.   Prohibited Employer Contact

In many cases, a former employer's noncompete enforcement efforts will include attempts to prohibit the employee from working with a new employer. Former employers who inappropriately contact new employers may face liability for doing so. See e.g., Bernard v. S.B., Inc., 270 Or. App. 710, 350 P. 3d 460 (2015), rev den, 358 Or 69 (2015).

     4.   Attorneys' Fees

Noncompetition agreements and the employment contracts in which they are contained frequently include terms allowing the prevailing party to recover attorney fees. Parties to contracts with such terms must be extremely careful because the costs of paying a successful opponent's attorneys' fees can be substantial.

     5.   Choice of Law

Contracts will often contain choice of law provisions that attempt to apply the law of a particular state. The application of these clauses will vary depending on the facts of a given case. However, employees and employers should see ORS 15.320(3), which specifies that Oregon law will apply to "[a] contract of employment for services to be rendered primarily in Oregon by a resident of Oregon."