Please note that the chart has been revised through today, March 25, 2016.
On March 22, 2016, Utah passed the Post-Employment Restrictions Act.
Under the Act, all new noncompete agreements executed on or after May 10, 2016, are restricted to one year; any agreement that violates this limit is void. Section 34-51-201.
The Act does not operate retroactively (section 34-51-201), nor does it apply to nonsolicitation agreements or nondisclosure agreements (section 34-51-102 (1)(a)). It also excepts from its purview “reasonable severance agreement[s] mutually and freely agreed upon in good faith at or after the time of termination that includes a [noncompete]” (section 34-51-202(1)) and noncompetes “arising out of the sale of a business, if the individual subject to the restrictive covenant receives value related to the sale of the business” (section 34-51-202(2)).
The Act also provides that the employer is liable for the employee’s attorneys’ fees, costs, and damages if “it is determined that the post-employment restrictive covenant is unenforceable . . . .” Section 34-51-301.
There will be quite a few things to sort out, not the least of which is what does it mean to be “determined that the post-employment restrictive covenant is unenforceable”? For example, what if the agreement is reformed and then enforced? Similarly, what is a “reasonable severance agreement”? And what amount and type of “value” will suffice in a sale of business? How judges handle these and other questions will be interesting to watch.
Time will tell.
The full text is here:
CHAPTER 51. POST-EMPLOYMENT RESTRICTIONS ACT
Part 1. General Provisions
This chapter is known as the “Post-Employment Restrictions Act.”
Section 2. Section 34-51-102 is enacted to read:
As used in this chapter:
(1) (a) “Post-employment restrictive covenant,” also known as a “covenant not to compete” or “noncompete agreement,” means an agreement, written or oral, between an employer and employee under which the employee agrees that the employee, either alone or as an employee of another person, will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.
(b) “Post-employment restrictive covenant” does not include nonsolicitation agreements or nondisclosure or confidentiality agreements.
(2) “Sale of a business” means a transfer of the ownership by sale, acquisition, merger, or other method of the tangible or intangible assets of a business entity, or a division or segment of the business entity.
Section 3. Section 34-51-201 is enacted to read:
Part 2. Scope of Post-Employment Restrictions
34-51-201. Post-employment restrictive covenants.
In addition to any requirements imposed under common law, for a post-employment restrictive covenant entered into on or after May 10, 2016, an employer and an employee may not enter into a post-employment restrictive covenant for a period of more than one year from the day on which the employee is no longer employed by the employer. A post-employment restrictive covenant that violates this section is void.
Section 4. Section 34-51-202 is enacted to read:
(1) This chapter 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 post-employment restrictive covenant. A severance agreement remains subject to any requirements imposed under common law.
(2) This chapter does not prohibit a post-employment restrictive covenant related to or arising out of the sale of a business, if the individual subject to the restrictive covenant receives value related to the sale of the business.
Section 5. Section 34-51-301 is enacted to read:
Part 3. Remedies
34-51-301. Award of arbitration costs, attorney fees and court costs, and damages.
If an employer seeks to enforce a post-employment restrictive covenant through arbitration or by filing a civil action and it is determined that the post-employment restrictive covenant is unenforceable, the employer is liable for the employee’s:
(1) costs associated with arbitration;
(2) attorney fees and court costs; and
(3) actual damages.
Below is a short supplement to March’s update on issues and cases making trade secrets | noncompete news. The developments are as follows…
Idaho: On March 17, 2016, the Idaho Senate Committee favorably reported out House Bill 487, a bill that would amend Idaho noncompete law by limiting noncompetes (supported only by employment or continued employment) to 18 months and creating certain pro-enforcement presumptions. For more, see Changing Trade Secrets | Noncompete Laws; Idaho bill strengthening noncompete contracts advances.
Illinois: On March 10, siding with the majority of United States District Court of Illinois judges, another United States District Court judge in Illinois (Judge Robert Gettleman in R.J. O’Brien & Assoc., LLC v. Williamson) rejected the controversial requirement in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), that a noncompetition agreement must be supported by at least two years of employment.
North Carolina: On March 18, the Supreme Court of North Carolina, in Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, reiterated its long-standing “strict blue pencil” approach “under which a court cannot rewrite a faulty covenant not to compete but may enforce divisible and reasonable portions of the covenant while striking the unenforceable portions.” The court stated its rationale as follows:
Allowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation. We see nothing but mischief in allowing such a procedure.
On March 10, in R.J. O’Brien & Assoc., LLC v. Williamson, another United States District Court judge in Illinois (Judge Robert Gettleman) weighed in on the controversial Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Fifield (which the Illinois Supreme Court refused to accept on appeal), you may recall, is the Appellate Court of Illinois for the First District, First Division decision that held that, if a new job (i.e., employment) is the purported consideration for a restrictive covenant, the employment must last at least two years to suffice – even if the employee terminates the employment.
Given its potentially-enormous consequences for the enforceability of noncompete agreements in Illinois, the decision has received tremendous attention.
Judge Gettleman summarized the state of the law following the Fifield decision as follows:
[S]ome Illinois courts have adopted a two year bright line rule. [Fifield v. Premier Dealer Servs., Inc., 993 N.E.2d 938, 943 (Ill.App. Ct. 2013)]; Prairie Rheumatology Assoc., 24 N.E.3d 58, 62 (Ill. App. Court 2014).
Other courts, however, have rejected the two year bright line rule in favor of considering other factors in determining whether sufficient consideration was given to enforce a restrictive covenant. Such factors include compensation (including raises and bonuses) and the terms of the employee’s termination. See Montel Aetnastak, Inc. v. Missen, 998 F.Supp.2d 694, 716 (N.D. Ill. 2014); Bankers Life, 2015 WL 515965 at *3; LKQ Corp. v. Thrasher, 785 F.Supp.2d 737, 742-44 (N.D. Ill. 2011).
The Illinois Supreme Court has not reached the issue. Four federal courts in the Northern District of Illinois have reached the issue, predicting how the Illinois Supreme Court would rule. Judge Holderman predicted and adopted the two year bright line rule. Instant Technology, LLC v. DeFazio, 40 F.Supp.3d 989, 1010 (N.D. Ill. 2014). Judges Castillo, Dow, and Shah have rejected the bright line approach and instead employed the fact-specific approach. Montel Aetnastak, 998 F.Supp.2d at 716; Traffic Tech, Inc. v. Kreiter, 2015 WL 9259544 at *5 (N.D. Ill. 2015); Bankers Life, 2015 WL 515965 at *3-4 (N.D. Ill. 2015). In addition, Judge McDade in the Central District of Illinois has performed an extensive analysis of the case law and also concluded that the Illinois Supreme Court would reject the two year bright line rule. Cumulus Radio Corp. v. Olson, 80 F.Supp.3d 900, 905-09 (C.D. Ill. Feb. 13, 2015).
Joining the majority, the court held as follows:
This court agrees with the reasoning of the Montel Aetnastak, Traffic Tech, Bankers Life, and Cumulus Radio decisions and concludes that the Illinois Supreme Court would reject a two year bright line rule in favor of a fact specific test. Two years may be sufficient to find adequate consideration, but it is not always necessary. In reaching this decision the court also finds persuasive Justice Schmidt’s dissent in Mudron, in which he points out the difference between the employee being terminated and resigning. As he noted in discussing the case on which the Mudron majority relied, “in Mid-Town [Mid-Town Petroleum Inc. v. Gowen, 243 Ill.App.3d 63 (1993)] the plaintiff “quit” because the consideration failed. The majority here holds that the consideration failed because [the defendant] quit. Big difference.” Mudron, 379 Ill.App.3d at 730-31 (Schmidt, J. dissenting).
It bears mention that the decision (denying defendant’s summary judgment motion) expressly notes that the plaintiff was seeking damages, i.e., (in contrast to the typical noncompete case) the plaintiff was not seeking injunctive relief. As the court observed (quoting Judge Schmidt’s dissent in Mudron), “even a peppercorn of consideration is sufficient to support a finding of adequate consideration when one seeks damages at law while more should be required when one seeks equitable relief.”
Accordingly, the impact of the decision on noncompete cases seeking injunctive relief is uncertain.
Mark your calendars!
With less than a day left, we’re down to the wire on Utah’s consideration of noncompete reform this session.
Prior to the amendments, the bill limited the maximum duration of an employee noncompete to one year and, for employers with 20 or more employees, imposed legal fees and damages on an employer who sought to enforce an unenforceable noncompete.
The amended bill maintains those same provisions, but adds several clarifications.
First, the new version of the bill makes clear that the law will apply only to employee noncompetition agreements entered on or after May 10, 2016. Second, the bill now makes clear that certain types of restrictive covenants agreements are not intended to covered; specifically, nonsolicitation agreements (though it is unclear whether this includes no-raid agreements, sometimes included within the term “nonsolicitation agreement”), nondisclosure (or confidentiality) agreements; noncompetes arising in the context of a (reasonable, good faith) severance agreement; and noncompetes arising in the context of a sale of business (where the individual receives value related to the sale (again, potentially a bit vague)) are all outside the scope of the bill.
The legislature adjourns today, March 10, at midnight. Stay tuned!
Below are the latest issues and cases making trade secrets | noncompete news since our last update …
Georgia: In February, the Georgia State Senate focused on the intersection between publics records acts requests and trade secrets, introducing a bill to expand the scope of Georgia’s definition of trade secrets, albeit in a very narrow respect. Specifically, the operative text of the bill (Senate Bill 321) provides, “Neither the state nor any local government shall publicize or otherwise make available 24 to the public any financial, operational, or consumption data related to a person’s use of 25 public utilities, water, or wastewater in any way which identifies such person’s use of 26 public utilities, water, or wastewater without the express consent of such person.” For additional information, see Senate Bill in Georgia Seeks to Expand the Scope of Trade Secret Protection.
Utah: In the ongoing debates over the proposed legislation in Utah to ban the use of employee noncompetes, following passage of the bill by the Utah House of Representatives, the bill was introduced to the Senate standing committee on March 1, 2016. On March 4, the Senate Business and Labor Committee took extensive testimony, pro and con, and issued a favorable recommendation for a substituted bill. See Employee noncompete bill stirs a hornet’s nest in Utah business community. The bill will be heard by the Utah Senate this coming week. The legislature adjourns on March 10 (at midnight), leaving little time for resolution of the hotly-contested bill.
Other noteworthy news…
- Noncompetes and Bankruptcy: An issue that occasionally arises is how a company can protect the interests otherwise protectable by a noncompete agreement (typically, trade secrets, other confidential information, and goodwill – though others exist as well) when its former employee who is subject to a noncompete has filed for bankruptcy. Ken Vanko wrote an excellent summary of the issues and analysis in his blog post, When Bankruptcy Law Collides with Non-Compete Obligations.
- Consideration for Noncompetes: One of the issues that regularly arises in noncompete litigation is whether the noncompete is supported by (sufficient) consideration. As reflected in our 50 State Trade Secrets Chart, one of the key areas of disagreement among the states is whether continued employment of the employee is sufficient consideration to support a noncompete. A recent case worth noting is NBTY, Inc. v. Vigliante, 2015 WL 7694865 (Sup. Ct. Nov. 24, 2015), a New York Supreme Court (i.e., the NY trial court) case (applying Delaware noncompete law). In that case, the court held that unexercised stock options were insufficient consideration for the restrictive covenant under Delaware law. of Outten & Golden LLP provides a nice analysis in Noncompetes Require Real Consideration to be Enforceable.
- Tortious Interference: Another issue that frequently arises in noncompete litigation is whether a former employer can be liable (typically, on a theory of tortious interference) for a new employer’s decision to terminate an employee in the face of a threat of enforcement of the noncompete. The issue is complicated, but John Paul Neflen of Burr & Forman provides a nice summary in Better Think Twice About Enforcing A Non-Compete.