H.B. 251, Utah’s Legislature Goes After Non-Competition Agreements
There is on old expression that “hard cases make bad law.” When judges or legislatures rush to alleviate some perceived abuse, they often make or interpret laws in a way which negatively affect the more typical scenario. One such concern is the rush by the Utah State Legislature to eliminate non-competition agreements. H.B 251, which prohibits many post-employment restrictive covenants, is just such a law.
Originally, there was an effort to effectively ban all non-competition agreements. While the Utah Technology Council and other business concerns were able to quickly respond and encourage amendments which improved the legislation somewhat, the rush to pass a bill without meaningful input from the business community at large and without careful deliberation by lawmakers is concerning to many. Utah has one of the best economies in the country in large part because businesses are attracted by the State’s business friendly environment. If the legislature suddenly looks like it is shifting to an anti-business stance like California, many of these companies will choose to relocate to states that are perceived as more business friendly.
For two decades I have counseled technology companies that their biggest competitive threat is often not the company across the street, but the employee in the next office. The director of sales at a small company not only likely knows all of the company’s clients, but who the contacts within the company are, what their buying cycles and price points are, what special arrangements were necessary to land them as clients, and any potential cracks in the relationship. The employee may also be the only real contact between the customer and the company. Moreover, employees can quit without notice and may be soliciting their former employer’s customers before the former employer can even hire a replacement.
Non-competition agreements can be difficult to enforce and non-solicitation and confidentiality agreements are often insufficient. Employees rarely announce that they are leaving to go into competition with the company. They do not warn that they are going to disclose confidential information to their new employers. Nor do they tell the employer that they have been subtly undermining the relationship between the company and its customer for months by blaming others at the company for problems while representing themselves as being on the customer’s side
Non-competition agreements are certainly subject to abuse. However, the ability to stop employees who have relationships with the company’s customers from being able to sell competing products to those customers is crucial to prevent the company from spending large amounts of money to acquire customers only to have them lost to the very people paid to acquire them. Likewise, it is crucial that companies spending millions of dollars to develop new products not have employees go to competitors and develop competing technology before their own products have even hit the market.
H.B. 251 has several provisions which are vague and leave the enforceability of any non-competition agreements questionable. Some sponsors have asserted that even the revised bill would eliminate all non-competition agreements except those contained in a severance package. No rational technology company would risk millions in investment on the hope that you can convince a fired/quitting employee to sign a non-compete after termination.
Another major concern with H.B. 251 is that it provides for an award of attorney’s fees when a former employee prevails in lawsuit, but does not provide attorneys fees if it sues and wins. While politicians like to paint the picture of the big evil corporation, Utah’s business community is mostly made up of small businesses. The threat of one-way attorney’s fees would discourage many small companies from enforcing a non-competition agreement even when there is clear misconduct on the part of the former employee. All it takes is for a judge to not want to impede the ability of the employee to make a living (despite the ability to do so without competing) and the company will be paying attorney’s fees from what is left of its business.
The legislature should slow down, carefully consider the ramifications of H.B. 251 and try to more evenly balance the competing concerns of individuals making a living and companies protecting their goodwill and confidential information. Business owners should quickly contact their legislators and let them know how important fair non-competition agreements are to their businesses. Companies looking to relocate to Utah should pause and consider whether Utah is really as business-friendly as we like to claim.