Changes to non-compete and restrictive covenant law in Utah
The Utah State Bar Employment Section was asked to respond to a proposed amendment as it relates to the current law for restrictive covenants such as non-compete and non-solicitation rules and regulations. Our firm write a response and raised concerns as to the current law as written, its effects and implications and further changes that should be changes to ensure the law was legally sound and properly focused on the specific needs of a company to enter into such an agreement.
Attn: HB 199 Section proposed amendment response
Dear Sir / Madam:
This e-mail is in response to the proposed amended changes to post-employment restrictive covenants as it relates to broadcasters. I would in the very least propose to pull the section as it relates to broadcasting companies as explained below. I would also request a proposal to language that would force companies to do their homework before deciding to place a restrictive covenant on an employee to curtail the high-amount of unlawful restrictive covenants that are being placed on employees within the state of Utah that negatively impacts Utah’s commerce and its ability to retain good employees within the state as well as the employees themselves.
A. Federal concerns: As to the the big picture, I do not see why the legislature has enacted a provision specifically tailored to broadcasting companies. It raises concerns as to the unlawful regulation of commerce under the federal constitution and the federal trade commission act and whether or not this is even a legitimate government interest they should be involved in as to regulating a specific industry.
It also raises questions as to whether or not the state is authorized to regulate this specific industry under the supremacy clause of the federal constitution and if the power to regulate this specific industry only falls under the powers of the Federal Communication Commission.
It also raises concerns on whether or not the provision violates the commerce commerce clause of the federal constitution and if the specific regulation of the broadcasting industry is made to protect specific state broadcasting institutions. It also raises questions on if this is a different standard than other businesses, how under the 10th Amendment, this falls under a power of the state to specifically create a double standard for a specific part of the industry.
If there is a double standard, it raises questions on whether or not this discriminatory purpose is legitimate as already noted and whether or not the double standard is an unlawful restraint on liberty if the standard is not applied equally as it would be to other types of employees.
B. State law concerns: The new amendment as amended with the additional language strays from the common law criteria for restrictive covenants. The common law focuses on whether or not standards to determine whether or not the employee and the unique training and investment the company has put into the individual has created a proprietary interest for the company where it would be a substantial loss to the company monetarily if that individual left.
There is also a balance as well on whether or not the main purpose of the restrictive covenant is to annoy and harass and to hedge an advantage against another competing company or if it is really intended to protect a legitimate business interest.
The restrictive covenants affects the employees, their livelihood their lifestyle and their family. It is generally implied and one could argue that if a restrictive covenant was imposed on a broadcast employee then they would most-likely have to uproot and leave the state to find other employment. The law as written, since broadcast companies are singles out, it incentivizes the broadcast industry to slap a restrictive covenant on every one of their non-exempt employees whether or under the criterion, it is legally or lawfully enforceable.
It would not be fair to employees that should not have a restrictive covenant placed on them, be forced to move if they never questioned or feared an unlawful policy.
The law attempts to mimic the common-law but it does not fully enumerate the criteria under the common law and gives no direction to courts on how to interpret the statute. As a result, there could be concern that the law may be adopted and applied and cut-out the common-law to other industries that don’t apply to broadcasting companies.
Also, what is a broadcasting company? Does it include cellphone companies? Does it include companies that manufacture cellphones? Does it include internet companies and providers? Does it include websites and website hosting companies? Does it include social media companies? Does it include software companies? The communication industry has become so robust that the term broadcasting could have overreaching consequences. Companies may try and reach to claim that they fall under a broadcast company in their trade to make a restrictive covenant last longer than it should.
Lack of mutuality at signing. One area of concern as well is when the restrictive covenant is signed, there is no indication at the time it was signed on whether or not that individual would qualify under the standard for non-compete. No special training or investment had been made to that individual at that time. As a result, a person and both parties that initially enters into a contract lacks “mutuality” to know whether or not they are the type of person that would need a restriction or would qualify.
They could not know until at the end of employment. Under that rationale, no covenant could be enforceable under contract law. The only way it could be enforceable is if there is a provision in the initial contract where it is anticipated that they would fall under the criteria stating specifically why they anticipate such under the non-compete standards. If no language that specifically states why there is a need under the special circumstances and trade of the individual and company then the contract should be considered void.
Company requirements. There would have to be some provision where at the end of employment the employer goes back and determines with the employee that the employee falls under the need for a non-compete based on the prior criteria. If the company actually never followed through with the criteria then they would have to admit that it could not be enforced at the end of employment and should be considered void. It should be outlined in each restrictive covenant why they need it to be enforced against the employee.
Under these standards, this is the only way a covenant could be enforceable and to get around the mutuality issue in the initial contract. It would also curtail companies from unnecessarily and unlawfully placing restrictive covenants in contracts when there is no need for one. There are too many unlawful restrictive covenants than there are bonafide ones. It is not fair for employees to have to seek legal counsel after the fact and be in fear of a potential suit when there is no justified basis for one. The restrictive covenants make it so good labor leaves the state of Utah when there was no lawful reason for them to leave in the first place.
Companies should be held accountable and do their homework before lazily place a restrictive covenant in a contract with no indication as to why one is needed. They should be forced to think twice before entering into a restrive covenant. If they did so, then we would have less unnecessary restraint on trades that can adversely and needlessly negatively affect commerce and ones livelihood and lifestyle.
The legislature should be aware of the unequal bargaining power that an employee has when they first enter an employment agreement with the company. Most employees don’t seek legal counsel to review the agreement before they sign and even if they did, employers still may refuse to budge on revising or pulling language on a unneeded restrictive covenant. An employer would never think a restrictive covenant as a “deal-breaker” to decide not to enter into an employment agreement.
The legislature should also be mindful of the day and age we live in and as it relates to the term of “globalization.” Small businesses no longer are local small businesses. They are able to easily sell and enter into markets all over the United States and the world. A small website design company that does designs for companies all over the U.S. could claim that the non-compete applies to the entire United States. Also, in the digital and internet market, more and more companies are merging.
Some employees are in such a special niche that there are only a few other companies they go to for employment after leaving another company.
That also needs to be considered when drafting law. Most companies are concerned most about client lists and contact information and taking established clients away from the company. However, those issues can already be properly addressed and enforced under trade secret law and other intellectual property rights, the area of law of which these restrictive covenants are focused on. I fear that the broadcast company provision has steered too far away from this formula and has created a different area of law of which it was not originally intended and falls into numerous legal traps and concerns.
If the law is intended to keep broadcasters from joining a competing local broadcast company because they are “the face of the franchise.” This claim is not well-taken. There is nothing the broadcast company did to that person as investment except hire them. It also raises questions on whether or not a restrictive covenant placed on an individual just because they are well-known in the community is a misappropriation of the name and likeness of the employee and if the company is unlawfully profits off the restrictive covenant based off the name and likeness of the employee.
Under all other respects as it relates to employees that are not known in the community from the unique nature of a broadcast company, there is no reason to hold all other employees to a different standard than any other business that manages and competes in a market for profit.
I appreciate your time and consideration as to my concerns above and appreciate the time you spend in determining the best interests of this state and its citizens.
The state is read as below:
34-51-201. Post-employment restrictive covenants.29
(1) Except as provided in Subsection (2) and in addition to any requirements imposed30 under common law, for a post-employment restrictive covenant entered into on or after May31 10, 2016, an employer and an employee may not enter into a post-employment restrictive32 covenant for a period of more than one year from the day on which the employee is no longer33 employed by the employer. A post-employment restrictive covenant that violates this34 subsection is void.35
(2) (a) Subject to Subsection (2)(b), a post-employment restrictive covenant between a36 broadcasting company and a broadcasting employee is valid only if:37
(i) the broadcasting employee is an exempt broadcasting employee;38
(ii) the post-employment restrictive covenant is part of a written employment contract39 [with a term of no more than four years] of reasonable duration, based on industry standards,40 the position, the broadcasting employee’s experience, geography, and the parties’ unique41 circumstances; and42
(A) the broadcasting company terminates the broadcasting employee for cause; or43
(B) the broadcasting employee breaches the employment contract in a manner that44 results in the broadcasting employee no longer being employed by the broadcasting company.45
(b) A post-employment restrictive covenant described in Subsection
(2)(a) is46 enforceable for no longer than the earlier of:47
(i) one year after the day on which the broadcasting employee is no longer employed by48 the broadcasting company; or49
(ii) the day on which the original term of the employment contract containing the50 post-employment restrictive covenant ends .51
(c) A post-employment restrictive covenant between a broadcasting company and a52 broadcasting employee that does not comply with this subsection is void.