What Is a Non-Compete Agreement?
Non-compete agreements are contracts that restrict an employee’s ability to compete with their employer for a specific period of time after the employment relationship is terminated. Typically, the agreements address the areas where competition is restricted so that the company can do business unimpeded. Common restrictions may cover products , services, geographical areas, and levels of competition. These agreements are typically defined as contracts in restraint of trade and are unenforceable due to public policy unless a legitimate business or legal interest is protected.
The Law on Non-Competes in the State of Utah
In Utah, the legal framework for non-compete agreements is provided by Section 58-1-11 of the Utah Code, which enumerates the requirements for enforceability. Under this statute, certain professional licenses or occupations are exempt from restrictive covenants, including physicians and surgeons, psychologists, naturopathic physicians, licensed professional counselors, and licensed mental health therapists. The Utah Supreme Court has not published an opinion specifically regarding non-compete agreements in the context of physician employment agreements or the scope of the exemption under the statute. However, in two recent non-compete cases, the Utah Supreme Court has agreed with a decision by the state Court of Appeals that held the exemption for non-compete agreements does not apply to physician beginning their employment with a hospital or a private practice. See, e.g., Soter v. Nelson, 2012 UT 8, considered here with Cortez ex rel. Cortez v. Utah Power & Light Co., 2012 UT 30 (although it involved only a very brief mention of physicians), and McCoy v. Clearwater Construction, 2012 UT 12.
What Utah Non-Competes Must Provide
In Utah, a non-compete agreement may contain several provisions that set out the terms of the agreement. The following are some of the key provisions that are common in these agreements:
Duration of Restriction. An important factor in enforcing a non-compete agreement is the duration of the restriction. The circumstances of the employee’s former employment, the customer relationships at the time the employee left, and the extent to which the former employer has restricted the employee’s ability to earn a livelihood all play into what is a reasonable time restriction. A common starting point for these non-compete agreements is 2 years. However, a court will consider the non-compete in the context of the employee’s ability to earn a livelihood and unique circumstances surrounding this particular employee and his or her former employer. Any non-compete agreement that restricts an employee’s ability to earn a livelihood must be reasonable under the circumstances.
Geographic Scope. Geographic areas covered by a non-compete agreement are often the areas in which an employee had actual business dealings either directly or indirectly with the employer’s customers or clients prior to the termination of employment. Although a former employee may want a greater area covered—easier to prove competition within that area—a former employer may only need to demonstrate the areas in which its former employee had direct contact with its customers or clients. This depends on the nature of the relationships the employee had with the employer’s customers as well as whether the employee had previously cultivated the relationships and trust of the customers.
Scope of Activities Restricted. Non-competition clauses usually include a nondisclosure clause. These clauses may limit the former employee’s use of trade secrets and other confidential information after he or she leaves the former employer.
Termination Upon Breach. Non-compete agreements may provide that the agreement terminates upon breach of the agreement by the non-compete employee. However, Utah courts do not enforce agreements only against the former employee’s breach. Courts may compel performance of the non-compete agreement against the employer’s breach. Thus, where the employer also has breached the contract, these agreements may not be enforceable.
Permits for Oklahoma Residents. Utah will not enforce a non-compete agreement that prevents an Oklahoma resident from working and residing in Oklahoma. The Court may modify the non-compete agreement to allow Oklahomans to work and reside in Oklahoma.
Recent Developments and Trends in Utah Law
In recent years, Utah law has developed in a way that has impacted non-compete agreements. Changes to both court interpretations and statutes in the past few years have made substantial improvements for employees and employers. Most importantly, Utah courts have clarified that non-compete clauses are enforceable even in at-will employment situations. In other words, both employees and employers can rely on these covenants even though you can terminate the employment relationship for any reason and fire an employee at-will.
But even with changes that have been helpful to employees in certain situations, noncompete agreements are still a gray area of the law in Utah. Courts have carefully scrutinized non-compete clauses when they are either (1) overly broad, (2) over-lengthy, or (3) restrict employees from working in a large territory. The most current example of this is the recent case of Landis v. Zenith Insurance Company. In a strong opinion, the Utah Court of Appeals ruled that California’s precedent allowing for liquidated damages in lieu of injunctive relief should not be followed in Utah. Utah courts must determine the reasonableness of non-compete covenants. The case was important because the Utah Court of Appeals prohibited the use of liquidated damages rather than an injunction to enforce a non-compete clause. It has always been the case that, in order for a non-compete clause to be enforceable, it must protect an employer’s interests.
Finally, the Utah Supreme Court is considering how a non-compete clause relates to the sale of a business practice. One such decision is expected soon.
Whether a Non-Compete Is Enforceable in Utah
In Utah, non-compete agreements are unenforceable unless they meet particular criteria. The agreement must be both reasonable in time and geographic scope. Utah courts most often consider timeframes of as little as a year sufficient, but three years is more commonly viewed as a fair period. As the U.S. Supreme Court pointed out in ELG Power, Inc. v. Black, 194 P.3d 931 (Utah 2008), "a one or two-year restriction may prove inadequate to protect" employers in specialized fields. If the trade secret or confidential, proprietary information protected by the non-compete can’t be learned or gained access to within one or two years, this deficiency could also hamper the enforceability of the agreement. However, one element of non-compete agreements that can’t be disregarded is consideration.
Consideration for a non-compete agreement can include other employment or training, such as instruction on business methods and sales techniques. In some cases, consideration comes in the form of a raise or bonus. Although knowingly signing an unfair or poorly written non-compete may not void the agreement, signing an agreement that explicitly states that the employee does not have the qualifications or training necessary to perform the job could do just that. This is where the courts in Utah usually draw the line. In general, non-compete agreements are enforced only when the departing employee has personal contact with consumers. For example , the Utah Supreme Court ruled in ELG Power that the former employee’s "vital role" in generating new customers and sales were reasons for enforcement of her non-compete. Moreover, "forbidding her to accept employment and disclose the names of her former clientele was reasonable," because it prevented the new employer from unlawfully using and benefitting from ELG Power’s proprietary business tools. In contrast, the court found that a former employee’s non-compete was unenforceable when he "had no face-to-face contact with clients and had no specific information about any existing customer or prospective sale." The court stated in that case that because "patented technology or other mechanical accomplishment" was the company’s "real treasure," it was unable to conclude that the former employee’s actions demonstrated "the kind of competitive conduct the covenant was intended to protect against."
Another consideration is whether the employee possesses confidential information that will remain in the employee’s possession after the end of the employment period. Generally, a non-compete agreement is likely to be considered unenforceable if the employee agrees to a non-compete without an accompanying nondisclosure agreement. For example, in ELG Power, the Utah court reasoned, "a less restrictive covenant would have been adequate to achieve its legitimate business interests." Thus, Utah courts have consistently held that non-compete agreements may not be formed via "coercion or stealth" (as in G-Tech Corp v. San Juan Computer Systems, 2006 WL 335893 (Utah 2006)).
Controversies & Concerns About Non-Competes in Utah
Despite the growing acceptance of non-compete agreements among employers and employees in Utah, these have not been without controversy and resultant challenges. Such challenges are often brought in state court as non-compete litigation continues to grow. A principal concern is that these covenants may serve to keep employees in a given position and in a specific place, regardless of their performance, even when benignly stated, limiting the mobility of these employees. Further, such agreements may act as a barrier to potential employers in hiring the best candidates, for fear of litigation or the additional cost in ensuring that all agreement terms are adhered to. If litigation results from the non-compete, the time and money spent can result in high costs to employers and employees alike.
Some are concerned that non-compete agreements do not impart fairness. These questions of fair treatment of employee and employer can take various forms. For example, a problem could arise when a former employer has maintained a non-compete from a time long before the existing standards of enforceability. These non-competes may represent a "holdover" of prior practice and tradition, resulting in an unfairly restrictive agreement for an employee.
How to Navigate a Non-Compete Agreement
For Employees
If you are in the process of changing jobs, you may be asked to sign a non-compete agreement. Before signing the agreement, ask the hiring company’s personnel or legal department about all the different ways that the agreement could impact your future employment, including a discussion of your post-employment restrictions on working for a competitor in Utah (and any other state) in all forms of business, including as an employee, consultant, contractor, partner or owner, and how long the agreement will affect your future employment or ability to open your own business compete.
Ask for a revised agreement that contains narrower market, geographic, and timeframe limits, as well as limitations on the non-compete’s enforceability. If the company refuses to change the agreement or provide you with one that is satisfactory to you, either (1) ask for more time to consider the agreement; (2) find out what the company is willing to pay you do in exchange for signing the agreement; and (3) if such compensation is sufficient and your other work opportunities are not attractive, consider signing the agreement with the understanding that you may be bound by its terms. However, if the non-compete agreement contains an overly-broad restriction, you may wish to consult with an attorney to make sure that the agreement will not create business limitations that will unduly hinder you from practicing your profession.
Even if you are presented with a non-compete agreement after starting employment, you may have negotiating power. Consider alternatives and approaches for negotiating with your employer some or all of the following:
For Employers
Employers in Utah should narrow the restrictiveness of their non-compete agreements. Companies offering employment to individuals in Utah should consider including in their non-compete agreements limited scope, geographic and time restrictions. Employers should also consider revising their non-compete agreements so that they do not apply to key employees, such as a beneficial owner of the company or executive officers. It is also recommended that employers include a severability clause in their non-compete agreements stating that if a court finds the agreement unenforceable, the restrictions will be invalid to the maximum extent allowed under the applicable law.
Employers seeking to enforce non-compete agreements in Utah should be aware that the state court respondents have a limited opportunity to contest a temporary restraining order. To obtain a temporary restraining order, a Utah plaintiff will be required to post, at a minimum, a bond equal to one year of the employee’s salary. Notably, a temporary restraining order will trigger an automatic stay of the action in Utah for the duration of the temporary restraining order.
Alternatives to Non-Competes
As mentioned previously, non-competition agreements are heavily disfavored in Utah. However, an employer still has a legal interest that it deserves protection. Accordingly, there are alternatives to non-compete clauses that Utah courts will uphold.
In the majority of employment contracts, employees are asked to agree not to "solicit" the business’ customers. These provisions are fairly common under Utah law. Non-solicitation agreements prohibit the former employee from soliciting clients for any other business. Under Utah law, these agreements must be specific as to the time period and geographic location where they apply.
Another popular clause in employment contracts is the "non-disclosure agreement." A non-disclosure agreement bars the employee from disclosing confidential information about the business , such as client information or internal workings of the business (such as business strategies or operational processes) to their next employer. These agreements can also be used to prevent entry into similar business by a former employee.
Occasionally, an employer might request an "exclusivity" agreement. This clause prevents the employee from working with any other company that provides similar products or services as the employer. Exclusivity agreements generally relate to the employee’s involvement in the business only. Generally speaking, exclusivity agreements are not governed by the Utah Uniform Commercial Code.