Your Employee’s Non-Compete Might Not Be Enforceable Anymore: Here’s What You Need To Know
In 2016, the Utah Legislature took an aggressive step in limiting non-compete agreements. Among other provisions, the legislature limited non-compete agreements entered into or after May 10, 2016 to one year. (Any non-compete agreements longer than one year were automatically void with the new provisions.) Further, if an employer sought to enforce a non-compete and that agreement was deemed unenforceable, the employer was liable to pay that employee’s damages, costs, and attorney fees.
New Legislature Limits Non-Competes
In the wake of these changes, employers seeking to enforce non-compete agreements faced a dilemma. On the one hand, they could decline to enforce the non-compete, which put them at a competitive disadvantage. On the other hand, they could enforce the non-compete, recognizing that they would incur liabilities if they lost. (The second option has become increasingly undesirable given the courts’ general attitude of disfavoring non-compete agreements.)
But Employers Found A Loophole
Faced with this dilemma, enterprising employers found a loophole. Instead of litigating their claims as breach of a non-compete, more and more employers are repurposing the same claims as the “misappropriation of trade secrets.” In so doing, they tip the scale back in their favor, placing all liability on the former employee. How are they able to do this? The answer is found in the broad language of Utah’s Trade Secret Act (UTSA).
The UTSA defines a trade secret as having three components:
- It is information that derives value from not being “generally known.”
- The information is not “readily ascertainable by proper means.”
- The information is subject to protective measures that are “reasonable under the circumstances.” (Utah Code Ann. § 13-24-2(4)).
This definition is highly fact-dependent and has been interpreted to include virtually anything. Customer lists, vendor lists, the type of equipment used in manufacturing processes, and even the names of former employees can be classified as “trade secrets” provided they meet the criteria outlined above.
What Employees Need To Know
But what exactly is misappropriation? Though it can mean acquiring a trade secret through theft, bribery, misrepresentation, and other improper means, it can also mean disclosing a known trade secret without consent of the company. (Utah Code Ann. § 13-24-2(2)). For example: A salesman leaves Door Manufacturer #1 to join a competitor, Door Manufacturer #2. The salesman had a non-compete agreement, but the company’s general counsel is concerned it will not be enforceable and therefore opts not to litigate.
One day the president of Door Manufacturer #1 gets a call from his best client asking for a 10 percent discount on an order of unassembled accordion doors. Although Door Manufacturer #1 usually sells fully-assembled accordion doors, occasionally it sells unassembled doors to preferred clients if they buy in bulk. But only someone who worked for the company would know about this.
The client then tells the president that a salesman from Door Manufacturer #2 recently offered to match its price on unassembled doors bought in bulk. The president believes that there is no way that Door Manufacturer #2 could have known about this preferred pricing or the option of buying unassembled doors unless this information had been provided by its former salesman. To prevent further disclosure and loss of business, Door Manufacturer #1 files a lawsuit for misappropriation of trade secret against its former salesman and competitor. Variations of this hypothetical occur every day, especially in an increasingly mobile workforce.
Though there have been recent changes in Utah’s non-compete laws, companies are turning more and more to trade secret laws to safeguard their business. New employers would be wise to remember that the UTSA cuts both ways. Although it may serve as a surrogate for a non-compete in certain circumstances, it also provides a competitor with a basis to sue you if you hire an employee with trade secrets and those secrets are unlawfully used or disclosed.
Ben T. Welch is a commercial litigator and trial attorney in the Salt Lake City office of Snell & Wilmer. His practice focuses on contract disputes, corporate governance and entertainment law.