“Non-compete” clauses are misnamed. These clauses, typically used in key employee agreements, actually promote fair competition. While it is true these clauses can prevent competing businesses from hiring former key employees for a short period and only for good reason (thus, the “non-compete” label), they also curb theft of business assets in important ways.
A bill (House Bill 251) introduced in the Legislature proposes to severely restrict Utah businesses from using non-compete clauses. Proponents argue that because states like California don’t enforce non-compete clauses and have high economic growth, if Utah severely restricts non-compete clauses it will accelerate growth. That theory seems unsupported and doesn’t justify the experiment HB 251 proposes.
Adopting unfriendly California-style business laws won’t promote Utah growth. In fact, it will do just the opposite. There’s no reason Utah should step on a slippery slope toward a California-type business environment just as Utah establishes itself as a prime business-friendly alternative to California. Rather, Utah should remain a safe haven from this kind of big government law championed a decade ago by union boss and Democratic State Sen. Eddie Mayne.
Utah’s tech and service economies are built on intellectual property — a type of property very easy to steal. Examples of intellectual property include patentable inventions in development phases, trade secrets, customer lists and business know-how.
When key employees of tech and service businesses leave, they have a treasure trove of their former company’s intellectual property in their heads — the “secret sauce” — that is easy pickings for unscrupulous competitors, if such competitors can get at it. And competitors frequently do, offering high signing bonuses and salaries as incentives.
These competitors artfully use subtle and not-so-subtle means to get at secrets of former employers. Eager to please, newly hired employees often yield to these industrial pick pockets, and do so confidently because their former employer rarely discovers this kind of “thieving by disclosure.” After all, illegal disclosures never happen in the open. Rather, former employees take great care to never let on that they’ve disclosed confidential information. This clandestine disclosure goes undiscovered — sometimes for years, sometimes forever.
For this reason, non-disclosure agreements (commonly used alongside non-compete clauses) are insufficient. Every business knows non-disclosure agreements are like small padlocks on a gate: They only keep honest employees honest. Alone, they’ve never been an effective deterrent to thieving by disclosure.
For that reason, 47 states legally recognize the proper uses of fair non-compete clauses. California, North Dakota and Oklahoma are the only exceptions. These 47 states (Utah included) judicially and legislatively limit non-compete clauses, allowing only the enforcement of clauses that are reasonable and fair to employers and employees. Many require the clause must relate to protection of a legitimate business interest, like protecting against property theft. These states (Utah included) only permit enforcement of non-compete clauses when they are limited in time duration, scope, and where companies have beforehand given key employees adequate compensation for agreeing to the clause.
Proponents of HB 251 no doubt believe their proposal protects rights of departing employees. I’m sure they even have some examples of unfair or overreaching non-compete clauses.
But in attempting to protect departing employees, let’s not ignore the rights of the large number of employees who remain behind, whose livelihoods depend on their employer’s ability to adequately protect assets and produce job-sustaining revenues to pay their salaries. Let’s also not forget the shareholders and other investors who have taken the risk on a Utah company’s ability to prosper by adequate protection of its assets — one of the reasons these businesses located here in the first place, and not in California or another place where vital business concerns take a back seat to an overwhelming and unbalanced concern for the rights of a single, departing employee.
I hope when these competing interests converge the Legislature will see that HB 251, as introduced, is bad for Utah, businesses in Utah and the majority of employees in Utah. An overly harsh ban or restriction on non-compete clauses risks the well-being of the many in favor of the few and threatens a business’ principal assets be laid wide-open to a competitor’s clandestine theft.
Unless altered, HB 251 is yet another example of a legislative solution looking for a problem and yet another big government restriction that puts Utah’s innovative and growth-oriented businesses at risk.
Jonathan Johnson is the chairman of Utah-based Overstock.com and a Republican candidate for governor in Utah.