March 10, 2016, marked the final day of the 2016 General Session of the Utah State Legislature. After a flurry of activity by legislators, both chambers passed H.B. 251, the Post-Employment Restrictions Act.
The Senate passed the 10th Substitute of H.B. 251 on March 9, 2016, by a vote of 22-6-1. Unlike the version the House passed on February 24, 2016, which prohibited non-compete agreements altogether with limited exceptions, the 10th Substitute permits non-compete agreements but limits them to a restrictive period of one year and to other common law restrictions (such as geographic scope).
The House quickly accepted the changes made by the Senate by a vote of 71-2-2. Now that both chambers have passed H.B. 251, the bill will head to the Governor for his signature. We have heard no indication that Governor Herbert would consider a veto, and even if he did, the bill passed by such wide margins in both chambers that it appears a veto could easily be overridden.
The final version of H.B. 251 (the 10th Substitute) contains the following provisions:
- An employer may enter into a non-compete agreement with employees, but the post-employment restrictive period cannot be longer than one year from the day on which the employee is no longer employed by the employer. Any non-compete agreement that imposes a duration longer than one year is void.
- The bill also incorporates any requirements imposed under common law. This means there will still be requirements that a non-compete agreement must be reasonably limited in geographic scope. Additionally, as has long been the case under Utah law, employers may only use non-compete agreements to safeguard their legitimate protectable interests (e.g., goodwill and/or confidential information).
- The bill does not prohibit a reasonable severance agreement mutually and freely agreed upon in good faith at or after the time of termination that includes a non-compete agreement.
- The bill does not prohibit a non-compete agreement related to or arising out of the sale of a business, if the individual subject to the non-compete agreement receives value related to the sale of the business.
- If an employer seeks to enforce a non-compete agreement and it is determined that the non-compete agreement is unenforceable, the employer will be liable for the employee’s costs, attorneys’ fees, and actual damages. The wording in this provision suggests that the liability is mandatory.
- The bill does not apply to non-solicitation agreements or confidentiality/non-disclosure agreements.
- The law will only apply to contracts entered into on or after May 10, 2016.
Although this version of H.B. 251 is an improvement over the original version that was introduced in the House, which banned non-compete agreements altogether, the attorneys’ fees provision is onerous and will likely have a chilling effect on employers’ willingness to seek enforcement of a non-compete agreement.
Utah employers should review their form non-compete agreements to make sure they comply with the impending new law. Once Governor Herbert signs H.B. 251 and it becomes law, any non-compete agreement given to an employee after May 10, 2016, that contains a non-compete restriction of greater than one year will be per se void.