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February 25, 2016Client Alert

Post-Employment Restrictions Act Passes House Unanimously

House Bill 251, which would significantly impact Utah employers’ ability to restrict former employees from unfairly competing against them, passed the House unanimously (72-0) on February 24, 2016. It now moves on to the Utah State Senate. House Bill 251 should cause Utah employers serious concern and will likely be a disincentive to out-of-state companies contemplating relocating to Utah should it become law.

We sent our first alert regarding H.B. 251 on February 12, 2016, but the bill has been amended since that time. The current version of H.B. 251 differs from what was originally introduced, but it is no less concerning. The bill still bans most non-compete agreements with employees.

The amended version expressly clarified some issues that were reasonably inferred from the original version and also added some entirely new items. The bill, as passed unanimously by the House, includes the following amendments:

  • The term “restrictive covenant” expressly excludes non-solicitation and confidentiality agreements.
  • The prohibition against non-competes only applies to agreements entered into on or after July 1, 2016.
  • Non-compete agreements are permitted in connection with the sale of a business if the individual subject to the non-compete restriction receives value from the sale of the business.
  • The bill does not prohibit a severance agreement mutually and freely agreed upon in good faith at or after the time of termination that includes a post-employment restrictive covenant.
  • The bill does not prohibit an employee from entering into an agreement with a restrictive covenant after termination of employment to protect any of the following:
    • A trade secret of the employer;

    • Proprietary or confidential information or process of the employer;

    • The employer’s business relations with the employer’s customers or employees; or

    • The employer’s investment in the employee, including investments in: (1) specialized training; (2) specialized education; or a (3) signing bonus.

Despite these amendments, from a purely practical standpoint, if an employer cannot prevent an employee from working for a competitor, there is little doubt that the former employee will inevitably share confidential information with his or her new employer, even if the employee is prohibited from doing so.  Employers will be forced to simply trust their former employees to be on their honor.  Additionally, conspicuously absent from the bill is the ability of an employer to protect its goodwill, which is one of the primary purposes of a non-compete agreement. Although somewhat of an abstract concept, a company’s goodwill refers generally to a company’s reputation, its brand and its expectation for continued business because of those things. Imagine, for example, the following scenario: Company X is the premier business in a particular industry, and Employee A is a trusted employee of Company X. Company X taught Employee A the intricacies of the industry, and Employee A gained unparalleled experience working for Company X. Under H.B. 251, nothing could prevent Employee A from resigning on a Friday, opening his or her own business on the following Monday and advertising his or her years of experience with Company X as a basis for customers to choose to do business with him or her

Given that H.B. 251 does contain a grandfathering provision, it would be wise for Utah employers that are contemplating implementing non-compete agreements to do so before July 1, 2016, as a precautionary measure. Additionally, Utah employers who disapprove of H.B. 251 should contact their state senator as soon as possible to voice disapproval of the legislation.

For more information, please contact your Michael Best attorney; Lisa R. Petersen at lrpetersen@michaelbest.com or 801.833.0483; or Judson D. Stelter at jdstelter@michaelbest.com or 385.695.6454.

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