Friday, May 6, 2016

New Utah Law Limits Use of Non-Compete Agreements

Every year marks the dawn of legislative efforts to restrict or expand the use of non-compete agreements. This year is no different, and the State of Utah wasted little time drastically restricting the use of restrictive covenants.

The Post-Employment Restrictions Act, known as House Bill 251, accomplishes three major objectives: (1) it limits the use of non-compete agreements to a duration of one year; (2) it exempts non-solicitation covenants from the applicable definition of a non-compete; and (3) it allows employees to recover legal fees if an employer seeks to enforce an unenforceable agreement.

The law takes effect next week, on May 10, 2016.

There is some room for interpretive guidance that surely will come. With regard to the non-solicitation exemption, the law offers no definition. An interesting question will be whether a broad non-solicitation agreement (which restricts any service of an employer's customers, as opposed to affirmative acts of soliciting them) rises to the level of a non-competition agreement.

Several sponsors of House Bill 251 authored a column before Gov. Gary Herbert signed the new law which advocated for its passage. One particularly interesting aspect of that column follows:

"We live in a free country whose prosperity is built on the free market, and as business owners we make choices. The best way for a company to retain its most valuable employees is to treat them well and compensate them sufficiently. Attempts to use legal tools to artificially block the movement of employees leads to a loss of trust and a loss of talent."

What interested me about this comment is that it actually resembles arguments that employees make in court. And that brings to the fore the notion that legislature are best suited to reflect these kinds of normative judgments, even though legislative change happens very slowly.

The state of non-compete law, though, renders courts susceptible to de facto policy making. The very factors courts must consider appear objective, but actually aren't. Those factors tend to lead  judges down the path of making rulings that reflect their personal policy preferences. This may not be a bad thing, ultimately, if the equities of the dispute match the result. But the problem is that the matrix of legal factors and how courts will apply them are highly unpredictable and can't possibly known to litigants or their counsel.

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