by Ryan B. Frazier
A new law passed by the Utah Legislature and signed by Governor Gary Herbert places new restrictions on noncompetition agreements signed after May 10.
All requirements imposed under common law not specifically changed by the new law are still applicable, meaning that noncompetition agreements must protect a legitimate business interest of the employer and must be reasonably limited in geographic scope.
The primary change is the creation of a statutory limitation on the duration of a covenant not to compete. Under the new law, an employer and an employee cannot enter into a noncompetition agreement that lasts more than one year from the date the employee is no longer employed by the employer.
Covenants made under the old law had to include a reasonable time period during which they were to be enforced. The reasonableness of a covenant’s duration was determined based on evidence showing why the specific time period was necessary.
Any noncompetition covenant that violates the new law, including the one-year limitation, is “void.” Courts in some states will “blue-pencil,” or modify, the duration of a noncompete to make it reasonable in light of the evidence. Taken literally, the new law suggests that not even “blue penciling” can save a noncompete that is longer than one year.
According to its terms, the new law doesn’t apply to noncompetition covenants that are already in place, just those created on or after May 10. Theoretically, noncompetition agreements signed before that date that last longer than one year wouldn’t be subject to the new one-year restriction, but courts may look to the statutory one-year limitation to determine the reasonableness of the duration of noncompetes created before May 10.
Exceptions
Not all noncompetition agreements are subject to the new restrictions. Covenants embedded in “mutually and freely agreed upon” severance agreements at the time of termination of employment are specifically exempted from the law’s restrictions.
Also, the law doesn’t prohibit a restrictive covenant related to or arising out of the sale of a business in which something of value is given in exchange for the purchase of the business. In addition, the law carves out exceptions for nonsolicitation agreements and nondisclosure or confidentiality agreements. Common-law restrictions and requirements are nevertheless applicable to covenants that are exempt from the law.
Risks
The law imposes potential liability on employers that seek to enforce noncompetition covenants that courts or arbitration panels decide are not enforceable. If the noncompetition covenant is deemed unenforceable, then the employer “is liable” for the employee’s arbitration costs, attorneys’ fees, court costs, and actual damages.
For more information on Utah’s new noncompetition agreement law, see the April issue of Utah Employment Law Letter.
Ryan B. Frazier is an attorney with Kirton McConkie in Salt Lake City, Utah. He can be reached at rfrazier@kmclaw.com.