Utah HB 251: What a Difference a Day Makes

scales-of-justice-glossy-mdWell, last we talked, Utah House Bill 251 had passed the House of Representatives and had just been assigned to the Senate Business and Labor Committee. It’s purpose was protect employees from overly onerous non-compete agreements. To that end, it allowed such agreements if (1) they protected only “trade secrets,” “proprietary information or processe[s],” or the employer’s “business relations” with customers and employees, and if (2) the agreements were only for a “reasonable time period or scope” or “within a reasonable market.” Courts have already kind of settled on two years as a reasonable time under current law.

The purpose of the proposed law was to allow ex-employees to immediately go out into the workforce and continue plying their trade, so long as they didn’t disclose trade secrets and proprietary information or steal existing clients from their former employers.

But don’t trouble yourself just yet over the wording just stated above. Apparently the Senate Business and Labor Committee has red pens and pencils in its chambers because the language of the bill has changed substantially. First the good news:

  1. “Post-employment restrictive covenants,” that is, non-compete agreements, can’t run longer than one year–so long “reasonable time period”; hello a concrete time limit–and
  2. The employer must provide adequate consideration for the agreement “aside from continued employment.”

I like those provisions, though I’d rather the one year be reduced even further, six months, for example.

Now the not-as-good news:

  1. The bill attempts to allow employers to prevent ex-employees from only directly competing with or working for a direct competitor of the employer. I like the sentiment, and it appears to be a good-faith effort to draw a line in the sand; however, that language and the language of the definition of “direct competitor” still places a lot of power in the hands of the old employer, who probably thinks anything that moves is a direct competitor. As I wrote in my previous post on this subject, the language of this bill and the language in a non-compete agreement means what the employer says it means until a court says otherwise. In other words, the threat of suit is always there, which is one reason I’m not a fan of non-competes.
  2. The bill attempts to define what “proprietary or confidential information” and dismisses employees in “common callings” from the class of employees who might have knowledge of such information. Again, the effort is there, but the language of the bill lets the worried employee down.

I’d have to say that on the whole, I like this bill better than the first, but that I’m still worried about the basic idea of giving essentially a complete stranger power over the life of another complete stranger for one year or two years or a reasonable time period. What do I mean by that? Well, these agreements often come into being at the time a person becomes an employee.  At that moment, the new employee doesn’t know much about the employer–they’re virtual strangers in other words. I find that disturbing.

My View: Utah House Bill 251 – Post-Employment Restrictions Amendments

Scales of JusticeYesterday, I clicked on the Deseret News and discovered a story of intense interest to me, a story about the Utah business community’s reaction to House Bill 251. I’m a businessperson. I work with businesses in my law practice. I’m about as pro-business as they come. And yet, I support this bill.

A little background–a disclosure, if you will: I have some clients who are currently burdened by non-compete agreements, clients who are very talented in their own right and who would like to start their own businesses. And they’re struggling with how to proceed because those non-compete agreements are worded vaguely enough and their former employer is feisty enough, that if they decide to do anything even close to what their former bosses’s company does, they are confident they’ll be sued for breach of contract.

Here’s the problem. They want to do kind of what they did at their previous employer, but using different tools and working with different clients. In other words, they don’t want to violate the non-competes.  Problem is the tool they want to use is a “hammer,” and one of the tools their former employer sells is, you guessed it, a “hammer,” albeit a different type of hammer that does different things than my clients’ “hammer.” (By now, you’ve probably guessed that I’ve changed the name of the tool for confidentiality reasons.) Nevertheless, per their non-competes, their former boss could come after them under a contract provision that says the following:

“Competitive Products” means any products or services [the former employer] sells or sold or that are competitive with products or services that [the former employer] sells or sold while [my clients] worked for [the former employer].

Do you see the problem? The employer could call virtually any product/hammer my clients use a “Competitive Product” under this definition. The contract then states:

 . . . for a period of two years after my employment with [the former employer] terminates, I will not (a) design, sell, develop, license, or solicit orders for or sales of Competitive Products, nor will I (b) affiliate with any business, whether as an employee, owner, officer, director, or agent, that performs any of the actions described in (a) for Competitive Products. (emphasis supplied)

You know that they say, or at least should say, “if the vagueness doesn’t kill you, the overbreadth will.” The Deseret News and others apparently think such language is fair. What’s good for business and all that. To wit:

[These agreements] keep employees from taking trade secrets or information about company strategies to competitors. They allow companies to invest in training employees without the worry that a competing company can take advantage of such largesse by luring a trained employee away.

Generally, these agreements include reasonable time limits, after which employees are free to work for whomever they wish. (emphasis supplied) (“In our opinion: Response to bill regulating business contracts suggests House leadership is at odds with business community,” Tuesday, March 1, 2016)

The law firm Michael Best agrees, saying

Non-compete agreements protect the goodwill of a company, which is something that a nonsolicitation and confidentiality agreement cannot entirely do. A company’s protectable interests do not just include its trade secrets and confidential information, but also its goodwill. Goodwill is often associated with the people who work for the company, and customers associate certain names and faces with a particular company. The purpose of non-compete agreements is to allow employers to invest in highly-trained employees and to have them work directly with the community and customers, serving as the face of the employer. Employers invest significant time, money and resources in doing so. Employers should be entitled to protect these investments by not allowing the employees who are associated with a company’s goodwill to leave and immediately work for a direct competitor. (What Utah Employers Should Know about House Bill 251, February 22, 2016)

As one who has, with his clients, looked down the barrel of a 2-year prohibition on future employment in the same industry, I suggest the Deseret News reconsider the term “reasonable time limits.” Hardly. Not when you’re prevented from working an an industry you love, an industry you’ve trained for most of your adult life–and not just at your immediate past employer’s. Riddle me this Batman: After that two-year hiatus, how sharp will that employee’s saw be?

What is a direct competitor by the way? Inquiring minds would like to know before they venture out, only to get swatted down by a rolled-up copy of their non-compete agreement. Until a judge says otherwise, a direct competitor is what the former employer says it is. And if the former employer is a bully? (What’s the saying? “Power corrupts; absolute power coupled with a non-compete corrupts absolutely.”)

As for the attorneys at Michael Best, employers are not the only ones investing significant time, money, and resources in training. So do the employees. Do employers think their employees came to them as blank slates? Heck no. By the time they arrive on an employer’s doorstep, employees have likely done years of schooling, including post-graduate work in many cases. They’ve probably worked for myriad other employers, gaining valuable skills, skills they’ve brought to their new employer’s table. And because they signed a non-compete–probably in a rush, possibly in glee at finally having a new job, likely without understanding fully the contract’s meaning, and surely not comprehending its consequences–an employer, generally a person they barely know, gets to control them for another two years–after they’ve left his or her employ.

You can bet the employer has thought this all through.

The problem, folks, is the playing field is uneven: The employer has the job, the salary, and the benefits. The potential employee needs a job, the money, and health insurance. The employer has thought the non-compete issue through many times. For the potential employee, it’s probably a problem of first impression. It’s car salesperson vs. car buyer. Price negotiation, finance terms, do you want the 2- or 5- year warranty on that doohickey vs. huh? In other words, unfair.

Hey, I get the impulse. I even understand that in some circumstances such agreements make a ton of sense. But not in all. In fact, I’d guess they make sense in very few cases. That said, I’ve just thought of a couple of potential compromises, so the Senate can vote yes on this puppy:

  • If an employer feels strongly enough about requiring employees to sign such agreements, then require the employer to split the cost with the potential employee of one hour with an attorney versed in such agreements.
  • In the alternative: Utah maintains offices throughout the state to deal with workforce issues. Require employers to send potential employees to consult with someone at the Department of Workforce Services about the consequences of signing such a contract–before they sign.
  • Finally, my least favorite, but better-than-nothing option: Require the employer thoroughly disclose the possible consequences of signing a non-compete–again, before the potential employee signs.

In short, if we’re going to allow these agreements in Utah, if we’re going to allow a virtual stranger to have control over an employee for two years after they’ve left a job, let’s give some protection to that employee. Do that so that if and when the employee actually does sign the non-compete, there truly has been a meeting of the minds.

Employee Background Checks: Be Careful Out There

Here’s an interesting podcast about the do’s and don’ts of employee background checks under the Fair Credit Reporting Act or FCRA. Enjoy now and avoid problems later.

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