By: Alex B. Leeman, Employment and Litigation Attorney
June 16th, 2017
(Part 1 of a 5-Part Series)
As an employment litigation attorney, the most common question I am asked about non-compete agreements is this: “Are non-compete agreements really enforceable?” My answer: “YES!”
The second question is usually: “So if my employee signed this non-compete agreement, it’s enforceable, right?” My answer: “Not necessarily!”
Non-compete agreements are a special type of contract called a “Restrictive Covenant.” A Restrictive Covenant—either as a stand-alone contract or a provision in a broader employment agreement—is intended to restrict an employee from engaging in certain behavior after termination of employment. These restrictions may include things like restrictions on working for a competitor, soliciting or doing business with customers of the former employer, poaching other employees, etc. Broadly speaking, a Restrictive Covenant is any restraint on open competition or employment.
Utah courts will enforce Restrictive Covenants, and do so regularly. However, different from ordinary contracts, restraints on open competition are enforced reluctantly. Courts will only enforce Restrictive Covenants that are expressly agreed on by the parties in a proper contract, and confined within certain bounds of “reasonableness.” The Utah Supreme Court has held that Restrictive Covenants may place “no greater restraint” than is “reasonably necessary” to secure protection of an employer’s “legitimate interests.”
What does this mean for you?
An employer may use a Restrictive Covenant to protect its “blood, sweat, and tears”—the competitive advantage it has earned through innovation, investment, nurturing of customer goodwill, and countless hours and dollars expended building a successful company. Employers can also use Restrictive Covenants to protect their extraordinary investment in certain employees and their proprietary and confidential information. The law recognizes that it would be unfair for an employee or competitor to take a short-cut to competitive parity without expending the same effort and taking on the same risk. However, an employer cannot use a Restrictive Covenant solely to keep competition out of the marketplace or to keep employees enslaved to their company. Open competition, workforce mobility, and consumer choice are important characteristics of our economy and a benefit to society.
Non-compete agreements, non-solicitation agreements, no-hire clauses and similar provisions are always evaluated against this backdrop.
Courts balance the competing interests of the employer and employee as they review each Restrictive Covenant to determine if it places “no greater restraint” than is “reasonably necessary” to secure protection of the business’ “legitimate interests.” Understanding this balancing act will help you craft Restrictive Covenants that will protect your business and have an increased likelihood of being enforced by the courts. With these principles in mind, Part 2 in this five-part series will look at who can be restricted by a non-compete agreement, before we later discuss the types of restrictions that will be upheld by the courts.
Alex B. Leeman is a shareholder in Prince Yeates’s commercial litigation section where he assists Utah business of all sizes with their legal needs. Mr. Leeman has experience with a range of employment-related matters.