What is a Non-Compete Agreement?

A non-compete agreement, often a clause found within an employment contract, aims to protect a business’ confidential information by preventing a former employee from working with a competitor for a certain period after leaving the job. When an employee signs a non-compete agreement, they are legally bound to comply with its provisions. Utah’s courts will enforce such clauses, but they must be reasonable in scope and duration.
In the state of Utah there is no defined statutory law concerning non-compete agreements. However, under Utah Code Ann. Subsection 58-69-202, a non-compete agreement must do the following to be enforceable in Utah:
There are also several other factors relevant to whether a non-compete agreement is enforceable in Utah. The first is that it must last for a reasonable amount of time. There is no hard and fast rule in Utah regarding what constitutes a reasonable duration for a non-compete agreement; it depends on specific circumstances. For example, shorter durations may be deemed reasonable for a lower wage position, whereas higher-level executive positions may justify a longer duration for enforcement of a non-compete agreement.
Non-compete agreements are not typically utilized for independent contractors , although they can be. More frequently seen in an employment context, the agreement should specifically identify the competitor to which the non-compete relates. The agreement may also explicitly state whether or not the non-compete cannot be assigned to new owners of the business, such as in the case of mergers or acquisitions of the competitor.
While there is no statutory law in Utah dictating how much consideration must be present to make a non-compete agreement enforceable, courts are likely to examine a sufficient amount of consideration, i.e., sufficient to establish a new contract. Generally, employment is sufficient consideration, because it’s often considered a new contract, also known as a "bargain for exchange," when a person is hired.
Even though Utah has always enforced non-compete agreements in the past, some recent legal cases have shown a willingness in the court to scrutinize them more heavily. A case that ended at the Utah Supreme Court, 02RG, LLC v. Lehi City, saw the parties dispute the language used in the appropriate non-compete agreement. Because of this, Utah courts may also consider the intent of the parties when evaluating the enforceability of non-compete restrictions.

The Law of Non-Competes in Utah

Utah has a non-compete law (Utah Code Ann. § 58-33a-304) that prohibits the enforcement of a non-compete agreement with a licensee in the state of Utah. In order to be enforceable, a non-compete under Utah law must fall into one of these exceptions to the statute:
• An owner or officer of a company, provided the provision affects the company shareholders.
• An employee who, as part of employment, is officed, or sells, purchases, or leases a business.
• An employer who attaches a non-compete to the sale of the business, as long as it is agreed to by the seller of the business.
• An agreement between partners, as long as it is agreed to by the resigning partner.
• A licensed employee who is terminated for cause, or who simply resigns (as long as the term of noncompete is reasonable).
• A licensed employee with a restricted area within 50 miles of the employer.
Only the employee in Utah can waive any of the aforementioned exceptions. If the employee waives the exception, the employee may be barred either temporarily or permanently from competing with the employer.
Utah non-compete law extends up to two years from the date of termination of the employment, unless longer duration is agreed to by the parties.
While Utah has not enacted any recent legislation changing its non-compete law, the passage of HB 485: Employment Amendments in June 2016 requires that all non-compete agreements must contain a notice to the employee, clarifying that the non-compete agrees to the exceptions to the law. Additionally, the law makes no exception for how or when the notice is given to the employee. For this reason, it is adviseable that the notice is given at the time of employment.

Enforceability of Non-Compete Agreements in Utah

Notwithstanding these limitations, Utah non-compete agreements may include reasonable restrictions as to the time, territory and scope of activity to be restrained. In addressing the validity of non-competition clauses, Utah courts have considered a variety of factors, generally identifying as the most important considerations whether the restraint is reasonable considering the context as a whole, and, if it is not, whether it can be reasonably limited to protect the party relying upon it, or, if it cannot, whether it is sufficiently outweighed by the interest of the restraining party. The primary question is whether the non-compete agreement protects a legitimate interest, is reasonable in the scope of the noncompetition, and is otherwise conscionable. Although Utah courts have not given bright line rules regarding enforceability, it appears that a non-compete that is reasonable as to time (two years has been held to be reasonable), activity (only relating to the type of work the employee performed for the employer), and territory (with a territorial limit of 50 miles held to be reasonable in the context considered) is more likely to be enforced.
In evaluating whether a non-compete agreement is enforceable, Utah courts will consider many issues, including the following:

Common Issues and Disputes

As discussed above, there are many factors that courts in Utah will consider when determining whether or not a non-compete agreement is enforceable. However, despite this case law, it is still relatively common for parties to get embroiled in disputes regarding non-compete agreements. As with any type of contract, a non-compete agreement may be challenged as invalid for a number of reasons. These include:

• The restraint was not supported by consideration;
• There was a lack of mutuality or the agreement lacked consideration at the time it was made;
• The restraint was too long in duration;
• The restraint covered an overly broad area;
• The agreement restricted activities that did not compete directly with the employer; and
• An agreement has expired, so there is no longer any need to seek enforcement.

These matters often result in legal action where the former employee challenges the scope and enforceability of the non-compete, or the individual’s subsequent employer is hit with a complaint from the former employee’s previous employer. Courts view post-hire restrictions, including non-competes, more skeptically than pre-hire restrictions.
Many of these cases focus on whether an agreement is reasonable or within the confines of the law, but the result has a cascading effect on other areas of the law. For example, if a non-compete is determined by a court to be unenforceable, then an employer may not be permitted to rely upon that non-compete when claiming misappropriation of trade secrets under the Uniform Trade Secrets Act. That said, courts will consider the possibility of reformation if a non-compete is generally reasonable, but unnecessarily expansive in its brevity of time, broad geographical scope, or scope of restricted activities. Also, there is a host of other statutes that may be relied upon, such as the Uniform Trade Secret Act.

Practical Tips when drafting a Non-Compete Agreement

To ensure the likelihood that a non-compete is deemed valid, and therefore enforceable, in Utah, the clause must be drafted carefully. All elements listed in the Enforcement of Non-Competes section (above) must be present in order to have a non-compete agreement that will hold up in court if challenged by the employee. An employer should start with an outline of its company interests and business needs for the non-compete, and how they relate to the specific employee it wishes to restrict. For example, if the employee in question is a social media manager for your company, prohibiting all online use of trade secrets for 24 months post-termination is probably overreaching, and will likely get struck down in court . Drafting the clause too broadly is one of the major reasons why non-competes are not enforceable in this state.
Because non-competes are disfavored in Utah, the initial presumption is against the validity of a restrictive covenant, and the burden is on the employer to demonstrate its reasonableness. Therefore, you may include provisions like: making the non-compete effective for only one year post-termination, ensuring the specific interest is protected, and/or keeping it limited to a certain geographical radius. Furthermore, if an employee challenges the non-compete agreement, it will likely be viewed in a "light most favorable to the employee." It is important, therefore, to carefully draft the non-compete when both parties begin their employment relationship.

Alternatives to Non-Competes

As the above discussion implies, non-compete agreements are viewed with distrust by both the legislature and the courts, and are often "partially severed" so that they are no longer effective to prevent the worker from earning a livelihood. Non-competes are subject to stringent tests of "reasonableness" in scope and duration. But Utah employers can use other types of agreements with employees that will protect their business interests without running afoul of the law or inviting litigation. Non-solicitation clauses enable employers to protect their investment in customer relationships without violating Utah’s non-compete law. Utah Code Ann. § 34-52-202 prohibits contracts that restrain former employees from soliciting clients. The text underlines the importance of having a lawyer review any non-solicitation clause for businesses to be assured that the clause is effective and complies with what the law allows. Finally, confidentiality agreements are also valuable tools to protect confidential information. A well-written confidentiality clause has broad latitude in protecting employer interests, and if the clause is broken, the offending employee will expose himself or herself to a lawsuit. A confidentiality clause that addresses systematized policies and practices can protect important business interests without violating the statutes. Moreover, if confidentiality agreements are signed at the outset of employment, Utah courts have shared the Federal courts’ view that the lack of consideration is not fatal.

Obtaining Legal Advice and Guidance

Whether you are considering entering into a non-compete agreement or have already signed one, it is important to consult with a legal professional who is experienced in the intricacies of employment law and non-compete agreements in Utah. An experienced attorney can help ensure that your interests are protected before you enter into a non-compete and can provide guidance if the terms of your non-compete are not being honored by your former employer .
You should also be sure to consult with an attorney about a non-compete agreement as soon as possible if you believe your former employer is in violation of its terms. Challenging or negotiating a non-compete agreement can be complex, and the sooner you consult with an attorney, the better.