New Utah Law on Non-Compete Agreements
UTAH HAS A NEW LAW FOR EMPLOYEE NON-COMPETE AGREEMENTS. THE NEW LAW RESTRICTS THE NON-COMPETE PERIOD TO ONE YEAR FROM TERMINATION OF EMPLOYMENT. THE NEW LAW APPLIES TO ALL EMPLOYEE NON-COMPETE AGREEMENTS THAT GO INTO EFFECT FROM AND AFTER MAY 10, 2016.
In industries where customer lists are essential, an employer will frequently seek to prevent an employee from “stealing” clients through the use of restrictive covenants, such as non-competition covenants and non-solicitation covenants.
The restrictiveness of non-compete and non-solicitation agreements determines whether the contract will be enforced in court. A non-compete agreement prohibits a former employee from competing against a former employer for a specified amount of time. Normally, non-compete agreements are restricted to a specific geographic area.
A non-solicitation agreement is a less restrictive contract and is generally directed at preventing an employee from soliciting his or her former employer’s clients. Unlike the non-compete agreement, in a non-solicitation agreement, the employee is allowed to immediately start work in the same industry and in the same geographic area but may not solicit the customers of the former employer.
Courts generally view non-solicitation agreements more favorably than non-compete agreements as non-solicitation agreements do not impose limitations on an employee’s right to work. Non-solicitation agreements are generally viewed by the courts as imposing reasonable restrictions on former employees while the former employee is free to continue working in his or her area of expertise.
Utah courts have generally enforced non-compete agreements if they are reasonable in duration and geographic scope. In some states, non-compete agreements are not enforceable except in certain circumstances.
The 2016 Utah legislative session has recently ended. One Bill that passed the Utah House of Representatives and the Utah Senate is House Bill 251 which provides certain restrictions and limitations on employer – employee non-competition agreements. Prior to its passage, House Bill 251 was revised several times and the final version is a compromise bill. House Bill 251 (the “Bill”) was signed by Governor Herbert on March 22, 2016 and will be effective May 10, 2016.
Despite its specific new restrictions and language, the Bill continues to incorporate requirements imposed under Utah common law (case law). Under Utah common law, a non-compete agreement must be limited in duration and geographic scope so as to be reasonable and employers may only use non-compete agreements to protect their legitimate business interests.
This Memo provides basic information about House Bill 251 and is not meant to be an exhaustive discussion of the Bill or Utah law. This Memo cannot be relied upon as a legal opinion or otherwise by any person.
The Key definition in the Bill is “Post-employment restrictive covenant” which is defined as follows:
(a) “Post-employment restrictive covenant,” also known as a “covenant not to compete” or “noncompete agreement,” means an agreement, written or oral, 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 purposes of this Memo, I will refer to a post-employment restrictive covenant as a covenant not to compete.
Restrictions on Length of Non-compete Period
Under the Bill, beginning May 10, 2016, any covenant not to compete entered into by an employer and employee may not be for a period of more than one year from the day on which the employee is no longer employed by the employer. Currently, under Utah common law, a non-compete covenant must be reasonable in both time and geographic scope. It is not uncommon under current common law to see non-compete covenants applicable for a period of 2 or 3 years.
Under the Bill, commencing May 10, 2016, any new non-compete covenant which exceeds a period of one year from when an employee’s employment has terminated is void.
Non-compete agreements in place prior to May 10, 2016 may continue to have longer than one year non-compete periods subject to common law requirements of reasonableness in duration and geographic scope.
The One Year Restriction Period is Not Applicable to Non-Solication Agreements and Confidentiality Agreements
A Non-Solication Agreement and a Confidentiality Agreement are not subject to the one year restriction period of the Bill and may be for longer periods subject to reasonable limitations of common law.
The One Year Restriction Period does not Prohibit Longer Non-Compete Covenants Agreed to in Connection With the Sale of Business Transactions
It is typical in the sale of a business, whether it is an asset sale or a stock or other equity sale, for the buyer to require the seller and/or its owner to agree not to compete with the sold business following the closing of the transaction for some period of time. The Bill does not limit a non-compete covenant to one year if the non-compete covenant relates to, or arises out of, the sale of a business, provided that the individual subject to the non-competed covenant receives value related to the sale of the business. Accordingly, a non-compete covenant arising out of the sale of a business is not subject to a one year restriction period if the restricted person receives value in the sale.
The Bill does not Prohibit Longer Non-Compete Covenants Agreed to in Severance Agreement
Often, in connection with the termination of an employee’s employment, the parties will enter into a severance agreement that provides for post-termination severance payments to the former employee by the employer. The Bill does not prohibit a reasonable severance agreement mutually and freely agreed upon in good faith at or after the time of termination that includes a non-compete agreement.
The Bill Requires Employers to Pay Employees Attorneys’ Fees if Employer Unsuccessfully Tries to Enforce a Non-Compete Covenant in Arbitration or Litigation and the Employer Loses.
A very important section of the Bill imposes costs on the employer if the employer tries to enforce a non-compete covenant on an employee in an arbitration proceeding or in litigation if the non-compete covenant is determined by the arbitrator or the court not to be enforceable. This section of the Bill applies to non-compete agreements entered into before and after May 10, 2016. If the non-compete covenant is found to be unenforceable, the employer will be liable for the employee’s costs associated with arbitration or litigation including the employee’s attorney fees and court costs, and actual damages.
- On April 5, 2016