November 30, 2017

Non-Compete and Trade Secret Law in Utah: What’s Changed, What Hasn’t Changed and How to Prepare for What’s Ahead

The general rule in the United States has historically permitted non-competition agreements when they are reasonable in time and geographic scope.  California has been the leading exception.  Business and Professions Code section 16600 invalidates most non-compete agreements, favoring employee mobility over employer control:  “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.” Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968).  In California, employers can be held liable for violation of Section 16600 even when they do not attempt to enforce an invalid non-compete, because the mere existence of the agreement might chill the employee’s ability to exercise freedom of mobility. 

National Trend: Movement Toward California Rule?

A study published by the U.S. Treasury Department in 2016 concluded that non-competes harm worker welfare, job mobility, and economic growth. Several states have recently moved closer to California through legislative action, or have considered taking action to restrict the use of non-competes in select businesses or groups of employees:

  • Hawaii 2015 (Act 158): bans non-competes, non-solicitation agreements for technology businesses, defined as any business that “derives the majority of its gross income form sale or license of products or services resulting from its software development or information technology development, or both.”
  • Arkansas 2015 (Act 921): Non-competes must be reasonably necessary to defend a protectable interest of employer.
  • Idaho 2016 (HB 487): Non-competes limited to 18 months unless additional consideration provided, limited to geographic area where employee provided services or had significant presence.
  • Illinois 2016 (SB 3163): Prohibits non-compete agreements for workers earning less than $13.00 / hr. or minimum wage.
  • Rhode Island (R.I. Gen Laws 5-37-33): Connecticut (P.A. 16-95), New Hampshire (SB 351) 2016: laws limit non-competes for physicians.
  • Alabama 2016 (Ala Code 8-1-1): Limits non-competes to location where employer operates similar business; only presumed valid for two years.
  • Nevada 2017 (AB 276): Must be supported by valuable consideration, must protect legitimate employer interest, cannot restrict employee from serving employer’s customer who employee did not solicit, cannot bar service to former customer who voluntarily leaves.

Utah Almost Followed the California Rule in 2016

Prior to 2016, non-competes were considered enforceable in Utah if they were reasonable in temporal duration and geographic scope.  Reasonableness was based on the facts of each case.  Agreements must also be “carefully drawn to protect only the legitimate interests of the employer” (Robbins v. Finlay, 645 P.2d 623, 627 (Utah 1982)), which include trade secrets, the goodwill of a business, and investment in the education or training of employees.  (Sys. Concepts, Inc. v. Dixon, 669 P.2d 421, 426 (Utah 1983); Rose Park Pharmacy, 237 P.2d at 823.)

Under existing Utah law, a non-compete signed when employment begins is supported by sufficient consideration (Rose Park Pharmacy, 237 P.2d at 828).  For at-will employment relationships, the Utah Supreme Court found that continued employment or the promise of continued employment may be sufficient consideration to support a covenant not to compete (Sys. Concepts, 669 P.2d at 426-427, 429).

Utah House Bill 251, introduced during the 2016 legislative session and passed by the House of Representatives, would have effectively banned noncompetition agreements altogether, similar to California law.  Prominent Utah technology executives advocated banning non-competes and repudiated their own existing agreements.  Others praised non-competes for promoting fair competition and curbing the theft of business.  Following negotiation, HB 251 was dramatically scaled back from an outright ban to impose moderate new restrictions on non-competes.

The Utah Post Employment Restrictions Act applies to all restrictive covenants covering post-employment conduct entered on or after May 10, 2016. See Utah Code Ann. §§ 34-51-101-301.  The Act made the following changes to Utah law:

  • Prohibits non-compete agreements from exceeding one year after employment termination;
  • Requires an employer seeking to enforce a non-compete agreement to pay all employee litigation costs / fees for unenforceable agreements.
  • One-year limitation does not apply to reasonable severance agreements signed at or after the time of an employee’s termination.
  • Does not apply to non-competes arising out of the sale of a business if the individual subject to agreement receives value from the sale.
  • Does not prohibit employers and employees from entering into non-solicitation or nondisclosure agreements.

Non-compete agreements made on or after May 10, 2016 must meet the new one-year post-termination duration limit, and must also satisfy the previously established common law requirements.  Thus, following the new one-year rule does not ensure enforceability.  The new law does not affect (1) non-solicitation, (2) confidentiality, or (3) nondisclosure agreements or provisions.

Reasonable Geographic Restriction Still Required

Although the 2016 law imposed a one-year temporal limit, post-2016 Utah law still requires that a non-compete agreement must be reasonable in geographic restriction. Reasonableness depends on the facts of each case, and courts consider the nature of the employer’s interest that the covenant is designed to protect. (Rose Park Pharmacy, 237 P.2d at 828):  non-compete should last only as long as reasonably necessary for employer “to consolidate its goodwill in order to withstand any competition” by the former employee.)  The Utah Supreme Court has explained that the more local the interest protected by non-compete, the more narrowly drawn the geographic limitation must be (Sys. Concepts, 669 P.2d at 427).

Geographic restrictions found to be reasonable have included a two-mile restriction by a small pharmacy where the restriction was limited to five years; the Utah Supreme Court considered the number of other drug stores within the two-mile radius, the number of stores in the metropolitan area, and customers’ shopping habits (Rose Park Pharmacy, 237 P.2d at 828); and an unlimited geographic restriction where the employer cable company had customers nationwide, and restrictions on the former employee’s activity were better calculated to protect the employer’s interest than a geographic limitation (Sys. Concepts, 669 P.2d at 427).  Restrictions found to be unreasonable include a world-wide geographic scope where the provision barred employees from working for any other multilevel network marketing company for three years; the Court considered the geographic scope, and time limitations, and found a three-year restriction particularly unreasonable because marketing employees obtain income by recruiting other salespeople, and would likely lose their downline in three years. (Tahitian Noni International v. Dean, 2009 WL 197525, at * 3-4 (D. Utah Jan. 26, 2009)).

Cicero Study Might Point to Future Legislative Action

Utah House Bill 81, introduced in 2017, would have require employers to pay additional “consideration” (e.g. a wage increase or promotion) in order to impose a non-compete on a current employee.  The sponsor cited reports that employers were requiring current employees to sign non-compete agreements and terminating their employment a short time later, and supporters alleged that some employers have used non-competes to tie up software developers during slow periods.  However, business and legal groups pushed for further study before proceeding.

A study by Cicero Group, completed in February 2017, surveyed 2,000 employees and conducted focus groups of employers and potential investment firms.  The study reported that larger numbers felt the law would encourage growth (354) and encourage entrepreneurism (369) than those who believed it would hurt job growth (139).  A majority (1141) believed that the law protects the ability of employees to use their skills and work in their chosen profession, while a total of 353 felt the law should have gone further and eliminated non-competes entirely.  However, a fairly significant number (407) believed the law should have allowed a longer duration for non-competes in specified circumstances, such as protection of trade secrets or proprietary non-public processes.

A total of 520 respondents indicated that non-competes should not be allowed, while 1480 felt they should be permitted if something of value is given to the employee.  Respondents also varied in the type of employees for whom non-competes should be permitted: 78 for hourly non-management, 185 for salaried non-management, 222 for hourly mid-level management, 519 for salaried mid-level management, and 328 for hourly employees in a professional role.

Non-Competes in Utah: Where is this going, and What Can I Do to Protect My Company?

In light of the recent interest from the Legislature and technology community in chipping away at non-competes, employers should expect Utah to continue to review and restrict their use, especially for low-wage employees and technology employees.  Given the significant survey response in favor of allowing non-competes when additional value is provided, the extra consideration provision introduced in 2017 may also be revisited.  As the 2018 legislative session approaches, employers would be wise to watch for ongoing debate within the technology sector, where some favor limiting the use of non-competes, and in established industries which often rely more heavily on non-competes.

In order to comply with the recently changed law and prepare for the possibility of additional changes in 2018, employers should:

  • Revise non-competes for new employees to comply with the new one-year time limit.
  • Be careful about enforcing potentially non-compliant agreements, for which employees can now recover attorney’s fees; seek negotiated post-separation agreement where possible.
  • Continue to ensure compliance with geographic and other restrictions.
  • Review to ensure a reasonable connection to legitimate employer interest being protected.
  • Review the uniqueness of the employee’s position.
  • Pay for training and development to increase the likelihood of enforceability.