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Circumventing competition: When you need non-compete clauses. (Of Councel).

Well-known local news anchor Ruth Todd has been off the air recently, as she waits out her non-compete restriction with KSL before she can make the move to competitor KTVX. As KSL News Director Brink Chipman commented to The Salt Lake Tribune: "The way our attorneys interpreted the contract, the shortest time she could go on the air would be July. Latest could be fall of next year."

When valuable employees leave, similar situations are replayed over and over in Utah business. Former employers count up the clients or trade secrets they may lose to a competitor, new employers worry about their liability for hiring the employee and lawyers huddle over the non-compete clause in the employee's contract, trying to decide whether it's valid and how long it lasts.

For instance, Larry Benson, a Utah salesman for a butcher supply company, was immortalized in "Kasco Services Corporation v. Benson," a leading Utah Supreme Court case dealing with non-compete clauses. Benson was an outstanding salesman for Kasco, and developed close relationships with customers. When Benson quit and formed his own company to sell grinding plates, sausage seasoning and other butcher supplies, some 40 percent of Kasco's customers in Benson's territory followed him. Kasco sued to enforce Benson's non-compete agreement. The court agreed that Benson's 18-month non-compete agreement was valid, and enjoined not only Benson, but Benson's new business partners, from contacting Kasco customers.

Utah attorneys who are familiar with Kasco and other Utah non-competition cases have the following suggestions for drafting and enforcing non-compete agreements:

Narrowly Draft Non-Compete Clauses. Salt Lake lawyer David Arrington, who represented Kasco against Benson, notes that courts say non-compete agreements are contrary to public policy. They will, however, be enforced if the employer has a legitimate interest in protecting goodwill or confidential information, and if the non-compete is reasonably limited in time, geography and scope of work.

"If an employee is in a position to develop a close customer relationship, his employer owns that relationship, and should protect it with a non-compete agreement," Arrington says. "However, the noncompete can only last as long as it would reasonably take to get a new guy up and running, with a track record so that the customer doesn't see any difference between the new person and the old one. Employers make a mistake in imposing time restrictions which are too long or have no basis in how long it takes to replace the employee."

Employers also err in imposing non-competes on broad groups of employees. "The higher level the person is, the more likely that the court will enforce a non-compete agreement against that person," says Derek Langton, another Salt Lake attorney who handles non-competition cases. "Non-competes are worthless for low-level, behind-the-scenes people. Figure who in your organization could really inflict harm if they left your organization. If they couldn't inflict harm, don't waste your time."

Recognize the Interests that Can Be Protected. Good will (or customer relationships) and confidential information are the interests that are protected by non-compete clauses. In order to prevent former employees from using confidential information, the information must, in fact, be private.

"If you look at what some employers consider trade secrets," says Langton, "it would include every scrap of paper in the business. Employers should think through what the real trade secrets are and then mark them confidential, lock them up, put a computer access password on them, limit the people who have access to them. Courts won't prevent employees from using information that isn't proprietary or confidential."

Evaluate the Risks in Enforcement. Non-compete clauses can be enforced to protect an employer's business, but not to purposefully crush an employee. Sometimes the distinction can be subtle and depends on the employer's attitude.

"When a valuable employee joins a competing business, you're mad, you're nervous, you've got other people watching and you feel like punishing this person, but don't say so," Arrington counsels. "Keep the correct motivation of protecting the company's assets at the forefront. If the court finds you're enforcing a non-compete clause for an improper purpose, the court may rule against you."

Employers must also weigh the expense and uncertainty of suing a former employee against how remaining employees will react. "Everybody's watching to see what happens to John," Arrington comments. "If the employer does nothing, then other great salespersons may leave. Suing can stymie that 'jump ship' feeling."

Arrington notes that, in light of the Kasco ruling, even new employers may be enjoined or sued for damages, though they were not parties to the non-compete agreement.
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Author:Spendlove, Gretta
Publication:Utah Business
Article Type:Brief Article
Geographic Code:1U8UT
Date:Feb 1, 2002
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