Utah Legislature Imposes Limits on Post-Employment Non-Competition Covenants

The Utah Legislature recently enacted the Post-Employment Restrictions Act (Act), which took effect on May 10, 2016.  The Act restricts non-competition agreements with employees.  It does not limit non-solicitation, non-disclosure, or confidentiality agreements.  The Act applies to non-competition agreements executed after May 10, 2016, and to non-competition agreements entered into prior to, but renewed after, the effective date of the Act.  Employers should be aware of the Act and ensure that all non-compete agreements they use after May 10, 2016 comply with the Act.

Summary of the Act

The Act provides that “an employer and an employee may not enter into a [non-competition agreement] for a period of more than one year from the day on which the employee is no longer employed by the employer.” Utah Code § 34-51-201.  Any agreement that restricts competition for more than one year is void (not merely voidable).  Two types of agreements are excepted from this restriction: (i) a severance agreement and (ii) an agreement related to the sale of a business.

Under the Act, post-employment non-compete agreements must still comply with the common law.  For example, the agreement must still be supported by consideration, must be free of bad faith in the negotiations, the restriction must be reasonably necessary to protect the company’s goodwill or other legitimate business interest, and the restrictions must be reasonable as to time, scope of activity and geographic area.  See System Concepts, Inc. v. Dixon, 669 P.2d 421, 425-26 (Utah 1983).

The Act penalizes employers whose agreements are found unenforceable: “[I]f it is determined that the post-employment restrictive covenant is unenforceable” then the employer is liable for the employee’s “costs associated with arbitration,” “attorney fees and court costs,” and “actual damages.”  Utah Code § 34-51-301(1)-(3).  Employers should carefully review their current employment agreements and consider the limitations and restrictions imposed by the Act when entering into future non-competition agreements, and when contemplating steps to enforce them in litigation.

The Act consists of a scaled-down version of the bill (HB 251) which is much better for Utah businesses than the original bill.  The original bill sought to prohibit most post-employment restrictions.  One of DJP’s employment attorneys, David Arrington, worked with industry groups, legislators and the Governor to press for a more workable law.  Under the Act, Utah businesses are still able to establish post-employment limitations on competitive activities for proper reasons.

Durham Jones & Pinegar has experienced employment law attorneys who can ensure that your employment agreements comply with the new Post-Employment Restrictions Act and other provisions of Utah law.  If you would like to discuss the Act and how it affects your business, or obtain assistance in reviewing or revising your employee agreements, please contact one of the employment law attorneys at Durham Jones & Pinegar at (801) 415-3000.