By: Alex B. Leeman, Employment and Litigation Attorney
August 15th, 2017
(Part 3 of a 5-Part Series)
In Part 1 of this series, I explained that Utah courts will enforce Restrictive Covenants (like non-compete agreements, non-solicitation agreements, no-hire clauses, and similar provisions), as long as they are written to protect an employer’s “legitimate business interests” and they place “no greater restraint” than is “reasonably necessary” to do so. In Part 2, I discussed the types of employees that can be restricted. In this Part 3, I discuss the types of restrictions that are commonly placed upon employees, and how to ensure that these restrictions are enforceable.
Striking a Balance
When courts examine Restrictive Covenants, they often attempt to balance the interests of the parties. On one side of the equation, they examine whether a restriction protects an employer’s legitimate business interests—its innovation, investment, goodwill, etc. Courts respect an employer’s interest in protecting its hard-won business. Courts are also sensitive, however, to the burdens a Restrictive Covenant may place on an employee. It is one thing to require an employee to keep a business secret. It is quite another, however, to force an employee out of the workforce, leaving the employee unable to support his or her family.
Non-compete agreements typically restrict an employee from competing with an employer’s business for a period of time in a specific geographical area. Utah courts require that non-compete restrictions be “reasonably limited in time and geographic area” in order to be valid and enforceable. Generally speaking, the geographic restriction in a non-compete provision cannot be more broad than the territory encompassed by the employer’s business. This case-specific limitation makes sense—a medical office in Salt Lake City probably could not convince a court that its business would be harmed if a physician left and opened a practice in Vermont. However, the employer very well might be harmed if the physician opened a competitive practice in Sugarhouse. In contrast, an internet-based marketing company may field clients from across the country, and may convincingly argue that a nationwide geographical restriction is necessary to protect its business.
Historically, there has been no bright-line rule for time restrictions in non-compete provisions. Instead, courts engaged in a similar case-specific inquiry into the nature of the business and the employment relationship to determine the reasonableness of restrictions. Although an early Utah case upheld a five-year non-compete provision, more recent experience shows that time limits under a year can often be enforced, restrictions up to two years are sometimes enforced, and restrictions beyond two years are rarely enforced.
As discussed in a previous post, the law regarding time limits for non-compete provisions changed dramatically in 2016 with the passage of the Utah Post-Employment Restrictions Act, Utah Code § 34-51-101 et seq. Under this new law, any “post-employment restrictive covenant” entered into on or after May 10, 2016, that has a restrictive period longer than one year from the end of an employee’s employment is void. The Act defines a “post-employment restrictive covenant” as an agreement that an employee “will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.” The Act expressly does not apply to non-solicitation agreements or non-disclosure or confidentiality agreements. It also excludes non-compete agreements entered into at the conclusion of employment as part of a severance agreement, or in connection with sale of a business (so long as the employee benefits from the sale of the business).
Non-compete agreements entered into before May 10, 2016, continue to be governed by the old “reasonableness” analysis as to period of time. However, non-compete agreements entered into after this date are subject to the strict one-year limit. The new law also makes employers liable for attorney fees if they unsuccessfully attempt to enforce an invalid non-compete restriction. Therefore, employers should carefully review their non-compete agreements to ensure that they are compatible with current Utah law.
Non-solicitation restrictions are inherently less restrictive to a departing employee, and therefore are often easier to enforce. A non-solicitation provision allows a departing employee to engage in competition with the employer generally, but restricts solicitation of certain customers to protect the employer’s goodwill and investment in those customer relationships. Non- solicitation provisions may broadly identify the off-limits customers generally (i.e., all customers the employee had contact with while employed) or specifically (i.e., by name). Some non-solicitation clauses focus on preventing the employee from soliciting the employer’s customer, but will allow the employee to service the customer if the customer initiates contact. Other times, restrictions are drafted to prevent a former employee from doing business with former customers regardless of which party approached the other. This type of restriction can be drafted to protect any valuable business relationship—customers, suppliers, vendors, distributors, etc.
As with any Restrictive Covenant, an employer must be prepared to explain why the scope of the particular restriction is necessary to protect the employer’s legitimate business interests. In the case of a pharmaceutical salesperson, for example, an employer might explain why a departing salesperson should be restricted from contacting doctors in the employee’s sales territory to pitch a competing medication. This employee knows these customers’ needs, costs, sales volume, and incentives, and has built relationships with these customers on behalf of the employer. Taking this information elsewhere could give a competitor an unfair and unearned advantage. However, it may be more difficult to defend a restriction preventing the salesperson from pitching a different drug to doctors in another sales territory with whom the employee never had any contact.
Other types of restrictive covenants may be useful in specific situations. A confidentiality or non-disclosure provision generally restricts a departing employee from either using or disclosing a former employer’s trade secrets and other confidential information. A no-hire clause may restrict a departing manager from poaching former colleagues or subordinates, and may protect an employer from a company-ending exodus. A non-circumvention provision is designed to prevent a “cut-out-the-middle-man” scenario by prohibiting a former employee from directly offering products or services to a customer that the employee was supposed to be offering on behalf of the employer. These different types of restrictions can be used by themselves or in some combination, and either with or without a broader non-solicitation or non-compete restriction. Of course, the suitability of any Restrictive Covenant to a particular situation should be carefully considered in each instance, and experienced employment counsel should be consulted. A Restrictive Covenant that does not accomplish the goal sought to be achieved, or that cannot be enforced, is literally not worth the paper on which it is written.
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.