Utah Code Annotated § 34-51-101 et seq., titled as the “Post-Employment Restrictions Act,” creates new requirements and liability for employers with non-compete agreements. Understanding and taking proactive measures to comply with the new statute is important for all employers located in or doing business in the state of Utah.
The Post-Employment Restrictions Act drastically changes noncompete agreements or covenants not to compete. These changes include the codification of a time limit as well as specific provisions for damages.
First, the Post-Employment Restrictions Act defines a “noncompete agreement” as “an agreement, written or oral, between an employer and employee under which the employee agrees that the employee, either alone or as an employee of another person, will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.” Utah Code Ann. § 34-51-102(1)(a). By its terms, the Post-Employment Restrictions Act specifically does not apply to nonsolicitation agreements, nondisclosure agreements, or confidentiality agreements, Utah Code Ann. § 34-51-102(1)(b), so those types of agreements remain unchanged by the language of
the statute itself.
Next, the Post-Employment Restrictions Act provides that for any noncompete agreement entered into after May 10, 2016, the length of such an agreement may not be “for a period of more than one year from the day on which the employee is no longer employed by the employer.” Utah Code Ann. § 34-51-201. It is unclear whether courts will find that the limitations of Post-Employment Restrictions Act apply to agreements entered into before that date. Specifically, it is unclear as to whether courts will view the one year limit established in the Post-Employment Restrictions Act as a new benchmark for what constitutes a reasonable time limit under the common law. For this reason, it is important to note that the provisions of the Post-Employment Restrictions Act are “in addition to any requirements imposed under the common law.” This means that for a noncompete agreement to be valid, it must meet both the requirements set forth in the statute as well as the requirements that have been adopted by Utah’s courts. (This post focuses only on the requirements created by the Post-Employment Restrictions Act, common law requirements may be found in opinions issued by Utah’s courts, for example, see Allen v. Rose Park Pharmacy, 237 P.2d 823 (Utah 1951)). It is possible that a court could find that the one year limit is what is reasonable under the common law, and apply the limitation to a noncompete agreement entered into prior to May 10, 2016. Until there is further guidance from the courts or legislature, the safest practice will be to operate under the assumption that courts will limit noncompete agreements to one year after the employee leaves employment. There may be circumstances where it is advantageous to attempt to enforce a noncompete agreement entered into prior to May 10, 2016 for more than one year. Such circumstances should be discussed and evaluated with legal counsel.
Notably, the Post-Employment Restrictions Act includes several exemptions. First the Post-Employment Restrictions Act does not prohibit a severance agreement that includes a non-compete agreement, if it is mutually negotiated in good faith. Neither does it prohibit a noncompete agreement arising out of the sale of a business. While no Utah court has yet ruled on the extent of these exemptions, the language of the statute indicates that such noncompete agreements must still meet the requirements of the common law, but in these specific contexts may be extended for longer than one year. These exemptions will become clearer as courts have the opportunity to define the contours of the exceptions in their opinions. Employers should carefully ensure that any noncompete agreements which may be exempt from the one year limit, clearly fulfill all common law requirements, and should consult with legal counsel regarding the enforceability and risks of such agreements.
Finally, the Post-Employment Restrictions Act creates liability for employers that “seek to enforce” a noncompete agreement either through arbitration or a civil action, and the noncompete agreement is found to be unenforceable. The liability for the employer includes “(1) costs associated with the arbitration; (2) attorney fees and court costs; and (3) actual damages.” Utah Code Ann. § 34-51-301. Under the language of the Post-Employment Restrictions Act, such liability is only created if the employer seeks to enforce a non-compete agreement. As such, to avoid liability, an employer with an unenforceable noncompete agreement, may choose not to seek enforcement either through arbitration or a lawsuit. This should shield the employer from any liability, but it is best to notify the employee in writing that the company will not be seeking to enforce the noncompete agreement.
Recommended Best Practices for Employers Under the Post-EMPLOYMENT Restrictions Act
- For all New Agreements: Have a lawyer review your company’s noncompete agreement to ensure that it complies with the new requirements and discuss with your attorney which new employees should actually have a non-compete agreement, making sure that the common law requirements are also satisfied. Also include a mutual attorney fee and cost provision in any noncompete agreement. Under the new law, employees are given the right to recover attorney’s fees, however, this right is not given, by the Act, to employers. Including a mutual attorney fee provision in the agreement will allow employers to recover attorney’s fees if they successfully defend their agreement.
- For All Agreements in Place Prior to May 10, 2016: while they may still be enforceable, the safest option may be to replace the existing agreement with one that meets the new provisions. Note that any new agreement will need to meet all of the statutory and common law requirements.
- When an Employee Leaves: carefully weigh whether it is worth trying to enforce the noncompete agreement with that particular employee. The advantage in restricting competition may not be worth the risk. If you have a noncompete agreement that you believe is not enforceable, do not seek to enforce it and provide written notice to the employee that the noncompete agreement will not be enforced. This should help to shield the employer from liability for damages or attorneys’ fees.
- If You Have Questions: Seek legal counsel to answer any specific questions relating to your noncompete agreement. Paying for a review of your agreements may not only allow you to enforce it later, but may also save you thousands of dollars in attorneys’ fees and damages.