The Use of Non-Compete, Non-Solicitation and related Restrictive Covenants by Employers in Utah

A few days ago I ran across an article in the New York Times, "Noncompete Clauses Increasingly Pop Up In Array of Jobs", which talked about the proliferation of non-compete agreements in Massachusetts and the government's attempt to respond to this proliferation by proposing legislation that restricted the use of non-compete agreements. The article compares the experience of California's technology sector which has thrived despite California's general ban on the use of non-compete agreements in employment relationships, to what has happened in Massachusetts, which has largely enforced such agreements. It's a good read for both employers and employees about the impact and benefit (or lack thereof) of non-compete agreements.

I often discuss with my clients (both employers and employees) my general disdain for overreaching non-compete agreements intended solely to stifle competition or to prohibit employees from working. And, as with Massachusetts, we've seen an unacceptable proliferation of non-compete agreements in areas where no reasonable person could honestly suggest the agreements are needed. These agreements have been used to keep laborers and others engaged in common callings from working, such as hair stylists, machine operators, administrative assistants, Unix administrators, web designers, and other similar workers from earning a living.  These employees are always at-will employees who lack the financial resources to challenge unenforceable agreements.  And Utah law doesn't do much to help them.

Under Utah law, a non-compete agreement, although disfavored under the law, is generally enforceable if the agreement satisfies certain criteria.  Generally, non-compete agreements are only upheld "where they are necessary for the protection of the business for the benefit of which the covenant was made and no greater restraint is imposed than is reasonably necessary to secure such protection." Allen v. Rose Park Pharmacy, 237 P.2d 823, 826 (Utah 1951). To be enforceable the agreement  (1) must be supported by consideration; (2) not negotiated in bad faith; (3) must be necessary to protect the goodwill of the business; and (4) reasonable in its restrictions as to time and area. Id.

Utah courts have held that continued employment is sufficient consideration to support a non-compete agreement. In other words, if your employer tells you sign to sign the agreement or you will be fired, if you sign and you remain employed, that is sufficient "consideration" to support the agreement. In many other jurisdictions, that is not the case. Similarly, in many other jurisdictions, if you are terminated, there are limitations on the enforceability of the agreement. In Utah, it doesn't matter if you were laid off, fired because your employer thinks you're not a good worker (oh, the irony right?) or voluntarily quit. The agreement is still enforceable regardless of the reason for the separation.  

With respect to the second element, there is not significant case law in Utah on what constitutes bad faith. One example of bad faith, however, would be hiring an employee, requiring the employee to sign the agreement and then terminating the employee with the intent of only keeping the employee from working for a competitor (and not actually intending to employ the employee). There are a variety of other situations that could constitute bad faith, but Utah law is largely silent in this area. Utah law provides no guidance on this issue, and the Supreme Court has yet to have the opportunity to address the bad faith standard in detail.

The remaining two elements are where the case law gets murky in Utah. When is a non-compete agreement necessary to protect a legitimate interest of an employer (be it the employer's goodwill, an extraordinary investment in training, or trade secrets, or some other legitimate business interest), and when is the agreement reasonable in time (e.g., two years, three years) and area (e.g., Utah, the United States, the world)? One can easily image all the various arguments that can be made on these two elements. Additionally, the reasonableness of the restrictions and the necessity of the restriction is generally a fact question, which means it is often a question that must be decided by a jury or court.  

Because such determinations are fact questions, it makes it easy for employers to force employees to sign non-compete agreements, even where there is no risk that the employee's competition would damage the employer in any meaningful way. And that's what employers have done, aided by lawyers and law firms more interested in generating fees from such litigation than crafting real solutions to protect employers' legitimate interests. We've seen multiple large law firms more than willing to attempt to enforce covenants (or threaten to enforce covenants) no reasonable person would deem enforceable.

As any employee who has been involved in non-compete litigation can attest, it really doesn't matter whether or not the agreement the employee has signed is unenforceable under Utah law. An employer seeking to deter an employee from working for a competitor or starting a competing business can cause financial ruin to an employee simply by filing a lawsuit, seeking an injunction and pursuing litigation, whether or not the employer ultimately prevails. Even in the worst scenario, the employer can exact a transaction cost for an employee who dares work for a competitor. This creates a chilling effect on competition and, in reality, doesn't do anything to protect an employer's legitimate business interests.

The truth is that in many situations there is no need to have an employee sign a non-compete agreement. Yes, that's right. There is no need at all. Much less restrictive alternatives like non-solicitation clauses which prohibit the solicitation of former customers and non-disclosure provisions which prohibit the disclosure of proprietary information can provide more than adequate protection to employers. In addition, trade secrets and other proprietary information are already protected against use or disclosure, under other laws such as the Utah Uniform Trade Secret Act and common law remedies like breach of fiduciary duty, theft, etc.

So what should you do? 

Well, employees should always seek counsel before signing any non-compete agreement or other restrictive covenant. Don't be penny wise and pound foolish and think that there is no option other than to simply sign what is handed to you (you know, with all that other paperwork when you are hired). There are always options and a good lawyer can help you see those options and find a resolution to your problem.  And never - never - start a competing business or start working for a competitor prior to having a lawyer evaluate the agreement. Failure to do so can easily result in your own financial ruin, even if the agreement is not enforceable under Utah law. 

For employers, there's simply no need to pay for lawyers and legal fees to enforce agreements that aren't designed to protect legitimate business interests, and that do nothing to help you protect your proprietary information.  Despite what many lawyers and law firms want you to believe, you can implement agreements that are not designed in a manner to simply chill the free mobility of labor and to keep employees from working in their profession.  Failure to act reasonably can have significant costs beyond legal fees, including decreased employee morale, a loss of qualified talent and a general reputation of being a poor employer. Successful companies have found ways to protect proprietary information without stifling the free mobility of labor. All you need is good legal advice and a clear understanding about what is necessary to protect your business and its interests.