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4 Steps to Protect Your Business with Non-Compete Clauses



Some of the biggest threats to a company’s success can come from its exiting employees, and especially its executives. Yes, HR can recover devices and cards, and IT can change passwords and access, but without more there is no guarantee that an employee won’t take specialized knowledge or confidential information and set up a competing business down the block, or work for an existing competitor.

To combat this threat, many companies use non-compete clauses (NCCs).  When “properly negotiated and carefully structured,” NCCs can provide a way for both employers and employees to avoid legal drama because they “serve the dual purpose of providing departing employees clear expectations upon leaving the company, while simultaneously protecting an employer’s trade secrets and goodwill.”[1] Accordingly, NCCs have become quite common, with a recent study documenting the inclusion of NCCs  “in 78.7% of 1,000 chief-executive employment contracts nationwide in 2010.”[2]

NCCs are also quite common in Utah, and are considered enforceable if the following four conditions are met:

  1.  the NCC is “supported by consideration,”
  2. there was “no bad faith . . . in the negotiation of the contract,”
  3. the NCC is “necessary to protect the good will of the business,” and
  4. the NCC is “reasonable in its restrictions as to time and [geographic] area.”[3]

Notably, Utah’s Post-Employment Restrictions Act has recently set a new, one-year limit on the time period during which an employer may prevent former employees from competing in the marketplace in most cases. [4]

How can employers and employees fashion good NCC’s?  

First, if you are the employer and you want the covenant to be enforceable, make sure that you give something of value in return for your employee’s promise not to compete. This could be as simple as continued employment.  However, it could be easier to prove that you have created an enforceable NCC if you do something more, such as give your employee a raise or a promotion.

Second, watch out for, and scrupulously avoid, “bad faith negotiation tactics . . . such as deception, intimidation, [and] coercion.”[5]

Third, remember that even if a business does not need an NCC in order to protect its confidential information, the value of the business’s goodwill could justify prohibiting former employees from working nearby if proximate employment is “likely [to] draw away customers.”[6] 

Fourth, remember that there is a one-year limit on the duration of most NCCs in Utah and that the reasonableness of geographic restrictions in an NCC are “determined on a case-by-case basis[7] in light of such things as “the location and nature of the employer’s clientele.”[8]

 

References:

[1] William R. Knowlton, Implementing Noncompete Agreements in Utah: Protecting Business Trade Secrets, Goodwill, and Investment in Employees, Utah Bar J., May/June 2014, at 16.

[2] Id.

[3] Allen v. Rose Park Pharmacy, 237 P.2d 823, 828 (Utah 1951); see also TruGreen Cos., LLC v. Mower Bros., Inc., 199 P.3d 929, 932 (Utah 2008).

[4] Utah Code § 34-51-201.

[5] William R. Knowlton, Implementing Noncompete Agreements in Utah: Protecting Business Trade Secrets, Goodwill, and Investment in Employees, Utah Bar J., May/June 2014, at 16

[6] Allen, 237 P.2d at 827.

[7] System Concepts, Inc. v. Dixon, 669 P.2d 421, 427 (Utah 1983).

[8] Id.  And note that in recent years globalization has significantly expanded the acceptable geographic scope of an NCC.

 

© 2016 Kevin R. Worthy. All rights reserved.

 

Comments (6)

I could not resist commenting. Very well written! http://yahoo.org

Thank you!

I just wanted to express my thankfulness for the information shared by you… I could not leave this page without leaving a note.

Thank you for the article. Not much is still blurry in my head concept of the very protection of business, but well that I started reading this important article

I know a few cases when dismissed employees inflicted great damage on the reputation of the company and disclosed a lot of secret information.

If you want to save your company you have to get some particular knowledges. Be pleased with the result that you want.

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