One very real risk that businesses face is protecting the viability of the intellectual property and trade secrets associated with their products and services. To minimize this risk, employers have sought to protect their legitimate interests through voluntary contracts known as non-compete agreements. In most cases, these agreements state that an employee will not compete directly against their employer for a designated period of time after leaving. The contract protects the businesses assets by hoping to avoid the transfer of trade secrets, investments in professional client development, and additional market competition from the withdrawing employee.
Utah has previously relied solely on case-law and the court system to regulate these agreements. Non-compete agreements are, in fact, permitted in every state except three. Among those states is California. This past session, these non-compete agreements came under immense scrutiny from the Utah Legislature, through House Bill 251, Post-employment Restrictions Amendments. Largely driven by the national exposure regarding the proliferation of such agreements nationwide, the Legislature sought to address the issue, not understanding how critical these agreements are for our state’s premier business climate.
The initial draft of the legislation sought to entirely ban non-compete agreements, creating concern among the broader business community. Inevitably, with stakeholder input, the bill was altered to achieve an acceptable compromise.
Beginning in May of 2016, House Bill 251 will limit the length of any non-compete restrictions to one-year after employment ends. Any post-employment restrictions on competitive activity longer than one year will thus be voided. This bill does include exemptions from the one-year limit for non-solicitation, non-disclosure and confidentiality agreements, and non-competes related to the sale of a business, but employers that try to enforce an unenforceable restrictive covenant in court are liable for the employee’s costs associated with arbitration, attorney fees, court costs, and actual damages.
While the original bill intended to ban non-compete agreements entirely, the compromise bill’s most significant impact is that beginning May 10th the length of any Utah non-compete restriction is limited to one-year after employment ends. Any post-employment restrictions on competitive activity longer than one year will thus be unenforceable. This is the most restrictive time restriction of any state statute governing non-compete agreements and should be viewed as a substantial change from the status quo.
House Bill 251 provides exemptions from the one-year limit for non-solicitation provisions, nondisclosure and confidentiality agreements, and non-competes related to the sale of a business. The bill also preserves the common-law standard that restrictive covenants must be reasonable in geographic or market scope in order to be enforceable.
Another significant provision of the bill regards the cost of litigating non-competes. The new provisions in House Bill 251 mandates that employers that try to enforce an unenforceable restrictive covenant in court are liable for the employee’s costs associated with arbitration, attorney fees, court costs and actual damages. This again is above the nationwide average for governing these agreements and should force all employers to carefully tailor and enforce agreements.
Despite some of the burdensome developments, the business community must recognize the valuable stakeholders who made the compromise that was enacted possible. Although some businesses will continue to have concerns pertaining to House Bill 251, the shift from the original complete ban on non-competes, to a ban with exemptions (substitute 5), to the final bill (substitute 10) which has limited restrictions, should be viewed as a balanced solution for all involved. This illustrates the necessity of an engaged and vocal business community and the value of Chamber Member engagement.
Moving forward, employers are advised to revisit their post-employment restrictive covenants, to ensure reasonability, otherwise there may be attorney’ fees that arise as a penalty. Additionally, this monumental shift in the Legislature’s role in governing contacts and non-compete agreements should not be understated. The Salt Lake Chamber will be launching a new effort to fully understand the use of these agreements within the state of Utah and the impacts of the new law in coming months from all sides of the debate. The Legislature should carefully weigh any further efforts on the issue while employers adjust to the new statute and allow for further studies can be completed.