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Court hears argument over whether 25‑year services pact is exempt from Washington noncompete ban
Summary
At oral argument in Other Court, attorneys disputed whether a 25‑year services agreement tied to a sale of equity falls within Washington's narrow sale‑of‑business exception to the state's noncompete statute. Appellants urged a covenant‑by‑covenant analysis; respondents pointed to a $7.8M sale and high earnings as dispositive.
At oral argument in Other Court, counsel for the appellant asked the court to reverse an order compelling arbitration and held up the 25‑year services agreement as the central dispute over Washington’s noncompete statute.
"This appeal presents two issues," Andrew Escobar, counsel for the appellants, told the court, identifying whether the long services contract falls within the sale‑of‑business exception and whether Telos can be compelled to arbitrate. Escobar said courts must look to the nature of the covenant and the dispute, not just labels or a token equity transfer.
Responding, Matt Heneman, counsel for the respondents, told the court that Mr. Knudson received "over $7,800,000 for selling a significant percentage of ownership in his company, Hightower Bellevue Advisors, including the goodwill and the business relationships with clients and all rights to client fees and commissions to the Hightower entities." Heneman argued those facts bring the transaction squarely within the sale‑of‑business carve‑out to Washington’s noncompete law and that the statutory protections were aimed at lower‑income workers, not high‑earning sellers.
During questioning, the panel pressed both sides on how to allocate burden and how to treat multiple documents executed as part of one transaction. A judge asked whether the appellant bore the burden of showing he did not sell more than 1% of his business; Escobar conceded a sale of equity occurred under the unit purchase agreement but argued the court must examine whether the restrictive covenant is effectively an employment or services covenant, pointing to cases from other jurisdictions that treat hybrid transactions differently.
Escobar cited decisions such as Progressive Technologies and Palmer & Kay for the proposition that when a covenant is bound up in a hybrid sale‑plus‑services package, courts should analyze whether the dispute concerns the employment/services contract rather than the sale document. He also urged attention to geographic scope and the timing of when restrictive covenants run.
Heneman responded by pointing to the transaction's substance: he said the record shows a substantial equity payout and management fees that, he asserted, exceeded the statutory earnings threshold (he told the court the management fees were "more than $2,000,000 a year"). He argued that the PSAA (the 25‑year services agreement) cross‑references the SPA and UPA and should be read as part of the overall sale transaction, not treated in isolation.
The lawyers also debated whether references in some documents to "sale‑based" terms should control or whether courts should look beyond titles to the contractual substance. The matter was submitted after argument; the court did not issue an immediate ruling.
The court focused on three practical questions at argument: which party bears the burden to prove or disprove the sale‑of‑business exception, whether the PSAA's restrictive covenants are substantively employment/service restraints or sale‑related covenants, and how geographic scope and timing affect whether the covenant fits the statutory exception. The court asked counsel to address those points in briefing and reserved decision.
