A Former Employee Just Stole My Customers! Is My Non-compete Agreement Enforceable?

Terry Jessop & Bitner Newsletter

Issue 35, August 2016

If you are an employer, you may agree with American Crime Novelist Robert B. Parker when he said, "Sure, I have advice for people starting to write. Don't. I don't need the competition." In Utah, business competition can be fierce. For that reason, many employers require their employees to sign agreements prohibiting them from starting a competing business, or competing as an employee of another company. This is a good idea to be sure.

Utah's Non-Compete Statute

But, the law is against you. Utah law favors competition. A non-compete is legal in Utah only if it fits within certain narrow parameters. If it goes outside those parameters, it may be void and unenforceable. So, what are the parameters? Utah recently passed a law to solidify some of the rules that govern non-compete agreements. See UCA § 34-51-101 et. seq. It applies to all non-competes entered as of May 10, 2016.

New Rule and Exceptions

The main rule introduced by the new statute is that a non-compete cannot last for more than one year. If it does, it is void. The new statute applies mainly to non-competes entered as a condition of employment. It does not apply to non-competes entered as a condition of a severance agreement, nor does it apply to those entered as a condition of the sale of a business.

Furthermore, the new statute does not apply to non-solicitation agreements, which prohibit former employees from encouraging their previous co-workers to leave. It does not apply to nondisclosure or confidentiality agreements, which prohibit former employees from disclosing trade secrets and other confidential information, and which can be valid for a lifetime.

Other Rules from Previous Case Law

The new statute goes hand-in-hand with the limitations already set forth in Utah case law. For example, non-competes in Utah must be reasonably narrow in scope so as to protect only the legitimate interests of the employer. Factors courts consider to determine the reasonableness of a non-compete include: (i) limitations on geographical territory; (ii) the nature of the employee's duties (e.g., whether the employee provides special or unique services to the company); and (iii) the nature of the interest which the employer seeks to protect such as trade secrets, the goodwill of his business, or an extraordinary investment in the training or education of the employee. See Robbins v. Finlay, 645 P.2d 623 (1982). The reasonableness of a non-compete is determined on a case by case basis. System Concepts, Inc. v. Dixon, 669 P.2d 421 (1983).

Potential Risk of Enforceability

As a Utah employer, before you decide to sue an employee for breach of a non-compete entered after May 9, 2016, you should ensure it fits within the prescribed limits and is enforceable. If it is found to be void, you will be liable for the former employee's costs, attorney's fees, and other damages.

As always, we are here to help. Let us know if you have questions or if you would like us to draft a non-compete for you or review your existing non-compete agreement. This article is for informational purposes only and is not legal advice. Please consult a professional regarding your specific situation.

© Terry Jessop & Bitner August 2016