Joseph G. Ballstaedt
801.365.1021
joe@snjlegal.com
Generally speaking, a non-competition agreement is an agreement between an employer and an employee where the employee agrees to not compete with the employer’s business. They usually prohibit the employee from selling or offering to sell products or services that are like the employer’s products or services. Under Utah law, non-competition agreements (also known as non-competes, post-employment restrictive covenants, or covenants not to compete), are different than—although related to—non-solicitation agreements or nondisclosure or confidentiality agreements.
Are non-competition agreements enforceable? It depends. Utah law favors protecting a company’s interests but disfavors preventing competition. Although the enforceability of a non-compete will usually depend on the specific facts of the case, the more a non-compete protects an employer and the less it prohibits an employee from competing, the more likely it will be unenforceable. (Yes, it is difficult to separate those two purposes.) As a matter of public policy, we do not want people to be cut out of the workforce, so non-competes receive special scrutiny. On the other hand, we want to help support business and fairness in our economy, so non-competes have their place. In short, as discussed in more depth below, a non-compete must be reasonable in time and location, and it must generally attempt to protect the employee’s legitimate business interests. Usually, when an agreement is targeted at preventing competition in the marketplace, it fails, and a court won’t enforce it.
This post discusses a few ideas and principles regarding non-competes, including the benefits of non-competition agreements and some legal guidelines that govern whether non-competes are enforceable.
The Motivation for Non-Competition Agreements
There are many reasons employers in Utah want their employees to agree to non-competes. Many employers invest a lot of time, training, and money into their employees, and a non-compete provides an employee an incentive to stay with their employer, rather than take his or her training and skills to another business.
Non-competes can be an effective tool in preventing competition. It may be difficult, for example, for a new barber shop in the community to succeed if all current hair stylists in the community are employed and bound to non-competition agreements that prevent them from joining a barber shop down the street.
Non-competes can also protect a company’s business interests and its goodwill. For example, if a prominent figure in a certain business decides to move to another competing company, this can cause considerable damage. For example, for nearly a decade, Paul Marcarelli was the public face of Verizon (you may remember the catchy line: “Can you hear me now?”), but in 2016, he switched to Sprint, claiming in new ads that Sprint was just as good as Verizon but half the cost.
Supported by Consideration
A non-competition agreement must be based on consideration, a factor that is almost always met. Consideration is a legal way of saying that a benefit is exchanged between the employee and the employer. Usually, in exchange for being hired and paid a wage or salary, the employee agrees to sign the non-compete and be bound by its terms. But even if an employee signs a non-compete after being hired, the consideration is continued employment. “If you don’t sign this agreement,” the employer may state, “we’ll have to let you go.”
Protecting Legitimate Interests
In deciding whether a non-compete is enforceable, again, courts consider whether it is aimed at protecting legitimate business interests. If its main purpose is to prevent competition, it probably won’t be enforceable. This seems like a silly consideration since a non-competition agreement, by definition, prevents competition. It is the main goal of the agreement that matters. It must focus on protecting the business, not preventing the competition. For example, if the purpose of the agreement is to protect the company’s trade secrets, its goodwill, or its investment of time and money in the employee, the requirement that the employee not compete will more likely be valid. If, on the other hand, the agreement is focused on prohibiting an employee from expanding his skills and talents outside of the company, it may be unenforceable. Obviously, the distinction between protecting legitimate business interests versus improper attempts to prevent competition is not always clear. Perhaps the best question to ask is whether the non-compete is fair to the employer or whether it oppresses the employee’s growth. If the employee leaves and starts competing in a certain way, time, or place, will it feel like theft? Or will it be appropriate and healthy capitalistic competition?
Reasonableness in Time
How long can a non-compete last? In determining whether a non-compete is enforceable, this factor is probably the clearest. In 2016, Utah passed the Post-Employment Restrictions Act, which built upon and modified the laws on non-compete agreements that courts have been developing for decades in Utah (known as the “common law”). It governs all non-competes formed after May 10, 2016. It generally preserves the common law that preceded it, which did not state a clear duration, but it alters (or perhaps clarifies) the common law by explicitly stating that a non-compete cannot be longer than “one year from the day on which the employee is no longer employed by the employer.”
There are exceptions, however, to this one-year restriction. It does not apply to certain severance agreements that include a non-compete agreement, although it must still comply with common-law requirements of reasonableness. The one-year restriction also does not apply to non-competes related to the sale of a business. For example, it is likely that a non-compete between a dentist who sells his business to an up-and-coming dentist could extend beyond a year, preventing the selling dentist from attempting to form a new dentistry practice in the same community (and to retake the same patients that were part of the business sale) for a period of, say, the next two years.
If the one-year restriction does not apply, we fall back to the common law in Utah, which has not provided a specific duration for non-competes. Each case depends on and is determined by its unique facts and circumstances, and courts have explained that non-competition agreements should last only as long as needed for an employer “to consolidate its good will in order to withstand any competition” that the former employee may offer. Utah courts have indicated at times that even a five-year restriction might be acceptable, but in light of the legislation passed in 2016, if the one-year limitation does not apply, I imagine that courts will be very hesitant to support anything beyond a year—unless there are very unique and compelling circumstances.
Also, there may be times when a non-competition agreement for a year or less may not be enforceable. Again, each case is unique and is determined by its specific facts.
Reasonableness in Location
The geographic area of the non-compete often determines if it protects a company’s legitimate interests or if it improperly prohibits competition. The 2016 law stating a one-year limitation on time does not address the reasonableness of location but rather relies on the guidelines courts have established—i.e., the common law.
On the extremes, a non-compete that prohibits an employee from competing anywhere in the United States or anywhere in the world is probably unenforceable. It’s almost certainly oppressive and improper to attempt to prohibit a professional from using his or her skills anywhere. (Yet, depending on the facts of the case, sometimes it may be reasonable to prohibit competition across the country.) On the other hand, if the non-compete only prohibits the employee from setting up shop within a quarter mile of the employer’s business, this restriction probably reasonably protects the employer’s legitimate interests. For instance, it seems unfair to allow a former employer to set up the exact same business next door, stealing away the former employer’s clients.
Between these two extremes is where most non-competition agreements sit, and whether they have an appropriate geographic scope depends on the unique facts and circumstances.
Enforcing Non-Competition Agreements
What happens if somebody violates a non-compete? Employers can ask a court to enforce non-competition agreements by issuing orders that command the former employee from engaging in conduct that violates the non-compete. This type of order is called an injunction. The court can also make the employee pay the employer any damages that the breach of the non-compete caused. For example, if the employer can prove that the employee caused a decrease in profits or the value of the business, the employee may be responsible for these losses. However, these types of losses can be difficult to prove, and courts usually won’t force an employee to pay speculative, uncertain damages.
Generally, non-competition agreements require the employee to pay the employer’s attorney fees resulting from a lawsuit to enforce a non-compete, if the employer wins that lawsuit by showing in court that the employee breached a valid non-compete. Those attorney fee damages (or the employer’s costs of paying an attorney) are much easier to prove than lost profits or loss of goodwill. On the other hand, if the employee shows that it did not breach the non-compete or that the non-compete is unenforceable, the employee can usually force the employer to pay its attorney fees related to the lawsuit. The Post-Employment Restrictions Act expressly states that an employer is liable for attorney fees if the non-compete is deemed unenforceable.
Deterrent Effect
Employers may often push the limits of reasonableness. They may ask employees to agree to non-competes and post-employment restrictions that probably aren’t—or surely aren’t—enforceable because these agreements have a significant deterrent effect. In fact, the employer may have no intention of enforcing what it knows to be an improper and unenforceable non-compete agreement, but the fact that the agreement exists may keep the employee in fear of competing, which is exactly what the employer may want. The employee may believe that the agreement is enforceable. Or the employee may have doubts that it is enforceable, but not enough courage to breach it and compete against the employer. Or maybe the employee feels morally obligated to adhere to the agreement he or she signed. For whatever reason, the employee may follow the terms of the agreement and sits idle.
Help with Non-Competition Agreements
The information above does not address every aspect or nuance of non-competes. It is always helpful to discuss the unique facts and circumstances of your business or employment with an attorney.
If you own a business and want to discuss the benefits of a non-compete for your employees, give me a call. If you are an employee who has been offered a non-competition agreement or are considering conduct that might violate a non-compete, I can help. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com.
