How to Use a Liquidated Damages Clause in Utah Contracts

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Not your car. Not my car. Note the little sticker on the front bumper: don’t touch.

What happens when you suffer harm from a breach of contract that you cannot prove or would have a very difficult time proving? Such as for a delay? Often your damages will go unreimbursed.

One typical situation is for delay in contract performance– “Time Is Money,” right? The proof of damages under this axiom is often nearly impossible or at least impractical. For example, if a construction delay causes you to open your new business four weeks later than planned, how do you prove damages? You have no history of income and it would be claimed that any damages would be pure speculation. Enter liquidated damages. Continue reading “How to Use a Liquidated Damages Clause in Utah Contracts”

Utah Law Governing Non-Competition Agreements – April 2017 Update

20150823_175608The Utah Legislature recently passed and Governor Herbert signed a law in 2016 limiting non-competition agreements. It can be found at Utah Code Ann. 34-51-101, et seq. Please note that I updated this article as of April 2017. When the law initially started through the Legislature, it seriously limited non-competition covenants. The end result was much tamer.

Here are the highlights of the non-competition statute:

  • Post-employment restrictive covenants, i.e., non-competition agreements, are limited to one year from the date of separation;
  • The statute does not apply to clauses concerning non-solicitation, non-disclosure, or confidentiality;
  • Exceptions to the one-year time limitation include the following:
    • Severance agreements that are reasonable and mutually and freely agreed upon in good faith after separation; and
    • Agreements in conjunction with the sale of a business.
  • Attorney fees: The employer will be liable to the employee if the non-competition agreement is found to be unenforceable. Although Utah has typically found attorney fee provisions to be reciprocal (i.e., both sides can be the recipient of fees, depending on who prevails), the statute does not expressly provide for fees to the employer. The prudent employer, therefore, will include an attorney fee provision providing fees to the prevailing party to ensure that the employer can recoup attorney fees if it prevails.

The statute defines non-competition agreements as any agreement in which an employee or former employee agrees they “will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.”

One other note: the law in Utah is unsettled as to confidentiality agreements that act like a non-competition agreement but you should tread carefully. Utah courts are often pragmatic and if it talks like a duck and walks like a duck, the court will likely call it a duck. See Is Your Non-Disclosure Agreement a Non-Compete Agreement in Disguise? This simply means that you should carefully draft your confidentiality and non-competition agreements. You may find yourself with a void agreement if it is poorly drafted.

Effective Date: The law affects any agreement entered on or after May 10, 2016. The statute is not expressly retroactive.

Bad-Actor Employers Warned: Lastly, the statute imposes damages against an employer who seeks to enforce non-competition provisions that are found to violate the statute. The damages available to an employee include any costs of an arbitration, attorney fees and court costs, and actual damages.

Take-Away: Employers should reevaluate their severance agreements and employment agreements to ensure that such agreements are consistent with this new law. For many employers, the non-competition provisions are part of the employment contract signed when the employee is hired. Its effect is not felt until (hopefully) many months or years later when the employee leaves. It is important, then, that employers review their employment contracts now since later is too late.

There are issues and nuances that cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about employment, non-competition, non-solicitation, confidentiality, or non-disclosure agreements, call me, Utah attorney Ken Reich, directly. I have represented both companies and individuals in business matters and disputes involving employment agreements and related matters, including non-competition issues. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you or your company evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.

Do Your Contract or Settlement Negotiations Amount to Fraud?

IMG_1215Your initial response to the title question should certainly be ‘No’. In light of a recent case pending in the U.S. Court of Appeals, however, you may want to reevaluate your representations made in contract or settlement negotiations. A bank VP was convicted of fraud based on representations he made in a deal he made with his bank employer, even when the bank acknowledged and waived the obvious conflict of interest. Makes me think any amount of ‘puffing’ in contract or settlement negotiations could turn to a fraud indictment.

Set Up

Let me set up the facts. Be patient, the complex setup is worth the payoff pitch:

In the U.S. v. Weimert case, Weimert was convicted of wire fraud in a negotiated transaction. Weimert was a bank senior vice president and president of a bank subsidiary, IDI. IDI was a 50% minority owner in CCLP, LLC. The majority owner of CCLP, Burkes, held a right of first refusal on IDI’s shares in CCLP. As the real estate market was crashing in 2008, the bank accepted Troubled Asset Relief Program (TARP) funds from the US government.

In order to gain liquidity and avoid bankruptcy, the bank told Weimert to sell assets to make interest payments. Weimert found a legitimate buyer, Kalka, to make a ‘stalking horse’ offer on the CCLP shares held by IDI. Kalka’s letter of intent included a provision that gave Weimert, personally, a commission on the deal and a buy-in interest of 4 7/8%  in CCLP. Weimert took that LOI to Burkes, as he was required to do, and convinced Burkes to match the offer. Burkes matched it (almost, but that’s not an issue in the case).

Weimert then took Burkes’ offer to the bank board of directors. Weimert represented to the board that the buyer would not purchase the asset unless Weimert received the commission and the stake in CCLP. This was factually not true; the buyer made no such requirements to consummate the deal. Weimert’s conflict of interest was acknowledged and signed off by the bank’s attorneys. The bank waived the conflict and approved the sale but was ignorant of Weimert’s misrepresentation about the buyer’s alleged stipulation that he obtain a commission and interest in CCLP.

TARP inspectors investigated the transaction and brought wire fraud claims against Weimert since his negotiations on the deal were communicated across state lines. A jury convicted him on 5 of 6 fraud counts. The jury found that Weimert defrauded the bank by inserting himself in the transaction based on the misrepresentation that the buyer would only buy the CCLP shares if he obtained a commission and interest in it.

Weimert’s case is now on appeal. At oral argument, the judges raised issues of prosecutorial judgment and whether this claim should have ever been brought.

One judge commented: “I’m very troubled by the application of federal wire fraud to statements about parties’ negotiating positions. That is, what terms are important in this deal to whom.” He also noted, “I have not found any case law treating those sorts of representations by anybody under any circumstances as material for purposes of federal fraud statutes.”

Apparently, the judge questioned whether Weimert’s representations about the deal were anything but ‘puffing’ or negotiation tactics. This position appears to make the assumption that the bank could no longer rely on Weimert’s impartiality when it waived the known conflict that Weimert was now personally interested in the deal and whether the reason for his personal interest was because the buyer required it or because he wanted a slice of the pie does not give rise to a claim under the wire fraud statutes.

He’s bluffing, sure. This happens in deals. These are capitalist acts among consenting adults.

The same judge then questioned the prosecutor about his concern that this was just negotiation rhetoric and not fraud. The prosecutor countered with an argument that there was a conflict of interest. The judge responded that “[Weimert] has disclosed the conflict of interest. It is out there for everybody to see. The board brings in its lawyer and says, in essence, eyes wide open. We need to do this deal.” The judge clarified: “Let me be very frank about what concerns me about this … it seems to me that … this case comes very close to making negotiations subject to federal criminal prosecutions at the discretion of the U.S. attorney and the grand jury.”

The judge drilled down on what makes this case fraud when other deal negotiations are dismissed as puffing and rhetoric. The prosecutor responded that this case is different because Weimert “induce[d] [the board] to waive the conflict of interest by misrepresentation” and “inserted [him]self in the deal” by representing to the board that Burkes required it. The judge’s response: “He’s bluffing, sure. This happens in deals. These are capitalist acts among consenting adults” and commented that “[t]his case seems to me to break very new ground.”

If you are really interested, you can search the Seventh Circuit’s oral arguments here.

The Take-Away

Negotiating is an art. Parties constantly make representations based on their position and outcome goals. There are fine lines between ‘puffing’ and fraud. Weimert crossed over. Let me see if I can help clarify some of the gray areas.

In negotiations, you will find yourself in differing situations. For example, Weimert was in a position of trust as an employee and senior vice president. Even though his personal interest was disclosed to his employer, the bank, he was not free to lie about the essential facts underlying the transaction. He was still the only person reporting or presenting the deal to the board. Certainly there is still some ‘shame on you’ to be shared with the board. Under the circumstances, if the board had any concerns, it should have assigned another employee to oversee the transaction since Weimert was clearly conflicted.

You need to examine your position in the deal. Do you owe any duty to the other side in the deal? Are you related by blood, employment, or contract? Is the other party relying on your opinion, investigation, or valuation that is not otherwise disclaimed in the written agreement? Are you in a position of trust in relation to the other party? Do you exert control over the other party?

Likewise, the amount of scrutiny a deal will receive is a function of the amount at stake and the parties involved. The bigger the numbers, the more scrutiny, usually. If government funds are involved, such as the TARP funds involved in Weimert, you can expect a certain amount of additional oversight. The IRS also likes to look at big deals to make sure they get their cut. If you are crafting a deal to avoid taxes and your express negotiations are key to entitlement to a preferred tax treatment, be careful. Likewise for family transactions. You may find a sweet deal from your elderly uncle but you have to know that your cousins and siblings are going to look at it very closely and blame you if it goes south or you took advantage. Also, with elderly people, you need to make sure that competency is not an issue. Appearance of fraud is sometimes as powerful as actual fraud. Think about how it would look in front of a jury. Put it in writing and disclose anything you think might make a difference to someone in an armchair quarterback role a year from now.

Another note: you should not rely on your attorney to sanitize your misrepresentations. Attorneys are your agent and you are bound by what they say or agree to on your behalf. Also, take a look at the lawyer rules about representations:

Rule 4.1 of the Utah Rules of Professional Conduct provides:
In the course of representing a client a lawyer shall
not knowingly:
(a) Make a false statement of material fact or
law to a third person; or
(b) Fail to disclose a material fact, when disclosure
is necessary to avoid assisting a criminal or
fraudulent act by a client, unless disclosure is
prohibited by Rule 1.6.

The comments to this rule help clarify some of the question about representations in negotiations:

Whether a particular statement should be regarded as one of fact can depend on the circumstances. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category

(Emphasis added). My partner, Keith Call, recently addressed the subject in the Utah Bar Journal article “Is it Ethical to Be Dishonest in Negotiations?” (see page 40). His article is addressed specifically to lawyers but you may find it interesting.

There are issues and nuances for negotiations that certainly cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about negotiations or how to stay out of trouble, contact me, Utah attorney Ken Reich directly. I have represented both companies and individuals in numerous business matters and disputes since 1999. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.

When Your Employee Manual May Hurt More than It Helps- a Fresh Utah Example

IMG_4161You have carefully crafted your employee handbook to expressly and explicitly disclaim any contractual relationship with your employees and keep them at-will and then- BOOM. You got cute with the fine print. You kept your important language buried in the minutia of the handbook while keeping all the employee-friendly terms front and center. This may have been good enough in the past but it is no longer. Let’s look at Reynolds v. Gentry Finance Corporation, 2016 UT App 35, a recent case from the Utah Court of Appeals on this issue.

“[A]n employee handbook distributed to an at-will employee may modify the at-will employment relationship.”

A company’s employee manual is a great opportunity to define its employment relationship with its employees. In fact, employers often expect and hope that employees refer to the employment manual to understand the terms of their employment– not every employee warrants an employment agreement. Here’s where the Gentry company went a bit awry.

Gentry wanted to keep the bundle of at-will employee ‘privileges’ intact while at the same time make the broad statement that “NO EMPLOYEE WILL BE TERMINATED OR HAVE ANY ADVERSE ACTION TAKEN AGAINST THEM FOR BRINGING A COMPLAINT TO THE ATTENTION OF THE HOME OFFICE.” (Capitalization, boldface, and italics in Gentry’s handbook).

“Utah law allows employers to disclaim any contractual relationship that might otherwise arise from employee manuals.” To do this, however, the employer must include in the employee handbook “a clear and conspicuous disclaimer of contractual liability.” This is where it gets sticky and you need to step carefully because 1) “[t]he prominence of the text, [2)]the placement of the disclaimer, and [3)] the language of the disclaimer are all relevant factors in determining whether a disclaimer is clear and conspicuous.”

What does this mean? Well, for example, in a Utah Supreme Court case, a disclaimer that was conspicuously located at the top of a employee handbook and prominently bolded and SET APART by a text box was good enough or “sufficiently prominent” to put employees on notice of its terms. Use your imagination. Look at the ALLCAPS, italicized, and bolded statement from Gentry’s handbook. It stands out. And, if it stands out to you, it is likely to stand out to your employees. If you have questions, talk to a lawyer. I’m getting ahead of myself. Let’s get back to Gentry.

Gentry got sideways with its employee handbook even though it had four separate disclaimers in it. Unlike the disclaimer case example above and Gentry’s statement that an employee would not be terminated or had adverse action taken against them, Gentry’s disclaimer was nearly invisible. The court found that the disclaimer had not been placed at the top of the relevant policy, was “not prominent, not bolded, and not set apart by a text box. It [was], in a word, inconspicuous.”

So what? Well, for Gentry it meant that its employee could avoid having its case dismissed and a jury would get to hear her case. Juries are a mixed bag. If your employee handbook is clean and clear and meets all the right requirements to keep your at-will rights intact, you punch your ticket out of the case early and cheaply. Gentry, however, now gets to pitch its story to a jury who may be sympathetic to an employee that the jury may feel has been wronged.

The takeaway from Reynolds: don’t get cute with your employee manual. Don’t put the important stuff in the fine print or make it inconspicuous. Bold it. Put it in ALLCAPS and italicize it. Make it a black box label that cannot be ignored.

There are issues and nuances for employee handbooks that certainly cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about employee manuals, employment agreements, protecting your rights, or rectifying wrongs committed against you, contact Utah attorney Ken Reich directly. Mr. Reich has represented both companies and individuals in business matters and disputes. Using his many years of experience and backed by a firm of legal specialists in nearly every legal field, Mr. Reich can help you evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.

Utah Supreme Court Strengthens the Uniform Trade Secret Act for Utah Employers

20151030_110325-EFFECTSUtah businesses recently received a boost to their ability to protect their trade secrets from misappropriation by employees. The Utah Supreme Court smacked down a former employee’s efforts to make off with trade secrets in violation of both an employment agreement and Utah’s Uniform Trade Secret Act (UTSA). The case is Innosys, Inc. v. Mercer, 2015 UT 80. The gist is that Utah businesses now have a clearly easier time protecting their trade secrets.

Innosys has some pretty basic facts that a Utah employer will find common in nearly any attempt to enforce rights under the UTSA. Mercer worked for InnoSys, a technology company focusing on the defense industry, as an engineer. In its suit against her, InnoSys alleged that Mercer had violated a non-disclosure agreement and misappropriated company trade secrets. Mercer‘s disclosures and misappropriations were undisputed. During and after her employment with InnoSys, Mercer forwarded confidential emails to her private Gmail account, copied a confidential business plan to a thumb drive, and placed protected information on the record in an administrative (unemployment) proceeding.

InnoSys failed to convince the trial court that it had suffered a demonstrable injury as a result of the misappropriations. Convinced in its righteous position, InnoSys appealed. The Utah Supreme Court reversed and ruled against Mercer.

The Supreme Court teaches Utah employers and employees a number of important (and some more interesting than important) lessons:

  • Just because the trial court ruled that way does not mean the court got it right.

This case was batted around between three different trial court judges who all got it wrong. The Utah Supreme Court straightened them out. Cases do not always need to be appealed and will not always have issues that have a likelihood of success on appeal. Sometimes they do. An appeal is expensive and should be considered carefully but with the understanding that trial courts don’t always get it right.

  • Keep on enforcing your company privacy rules even if you think it seems pointless at the time.

InnoSys had rules about how its confidential materials could be accessed and precluded its employees from sending its materials through third-party email addresses like Gmail. The employee at first asserted that InnoSys had helped her set up her Gmail account and bypass InnoSys’s safeguards. She later recanted. If it had been true, however, InnoSys would have been deemed to have waived the problem. If your company has safeguards and rules about its confidential information, take them seriously and enforce them as necessary. Otherwise, you may be deemed to have waived them.

  • Emailing your companies’ trade secrets through a Google account (or other provider other than through your company email) “is at least arguably” an unauthorized disclosure of those trade secrets.

The trial court in this case received mounds of expert testimony (i.e., it was expensive and the parties took it seriously) on the issue of whether emailing through a third party provider such as Gmail was a disclosure of the trade secrets. The trial court and Supreme Court accepted the possibility and damages may be awarded. Hence, if you permit your confidential information to be transmitted via Gmail, you may have waived any disclosure that occurs as a result of the information being disclosed through Gmail.

  • There is no ‘necessary and appropriate’ defense for use of trade secrets by an employee.

Your employees have no right to use your confidential information under a claim that it is “necessary” or “appropriate” under the circumstances. Stick to your guns: this is your confidential information and you need to protect it. Mercer used confidential information in a wage dispute with InnoSys. She was wrong to do so and violated InnoSys’s trade secret rights.

  • A trade secret is a property right and any invasion of that right is actionable in court regardless of whether it causes measurable damage.

Mercer claimed (and the trial court agreed) that her violation of InnoSys’s trade secret rights was so small to be of no value. Wrong. The trial court fined InnoSys (among other reasons) because it could not prove actual or threatened harm. Wrong. The Utah Supreme Court made it clear that a violation of a trade secret right is presumed to have caused harm and an injunction to vindicate that right and prevent future harm is warranted. Your new motto should be (if you have valid trade secrets): ‘when in doubt, protect your rights.’

  • An injunction barring use of trade secrets does no harm.

An injunction protecting your trade secret rights is appropriate even if the other party (former employee, etc.) asserts they are not violating your rights: “If the defendants sincerely intend not to infringe, the injunction harms them little; if they do, it gives [plaintiff] substantial protection.” If you believe you need a court’s injunction to protect your rights, the Utah Supreme Court made it clear that you are entitled to such an injunction regardless of a defendant’s asserted innocence or lack of bad intent.

  • As long as you have a good faith basis to pursue your claims, “it matters not that [you] may have harbored an ulterior motive of retaliation.”

Mercer claimed that InnoSys was only bringing the trade secret action as retaliation against Mercer. Utah Supreme Court: so what. InnoSys was entitled to prectect its trade secret rights and its action to protect its rights in good faith cannot be deemed retaliatory.

  • The terms of and language used in your non-disclosure agreement (NDA) is important and a generic agreement will not be as helpful as one tailored to your business.

Mercer signed an NDA with InnoSys that defined “protected information” and limited Mercer’s use of protected information. Mercer also agreed to return to InnoSys and that due to “measure in money damage to InnoSys” from her breach, she agreed that “an injunction” would be appropriate to “minimize or prevent damage to [InnoSys].” The specific language of the NDA made it easier for InnoSys to enforce its agreement. Make sure your agreement has easily enforceable language too.

Make sure your NDA is up to date in terms of specific, protected information that it contains all of the terms that are needed to enforce it. I do not attempt to get into the specific provisions you need (I’ll save this for another time), but if you have questions, get legal help. It’s important to the long-term viability of your business.

  • Keep the original or a copy of your non-disclosure agreement or employment agreement if you want to be able to quickly and easily enforce it.

InnoSys initially could not find a signed copy of the agreement and Mercer claimed she did not have one. When InnoSys attempted to enforce an agreement it could not find, the trial court ruled against Innosys including fines and charging InnoSys with Mercer’s attorney fees in the amount of $229,481.58. Although the Utah Supreme Court appeared prepared to enforce the NDA without a signed copy (consistent with Utah Rule of Evidence 1004) you need to keep a copy. It will save you time and money when you need it most.

  • Even if you do not have an NDA, the Utah Uniform Trade Secret Act still protects your trade secrets.

Under the UTSA, an employer establishes a claim for misappropriation “on the basis of two essential elements: existence of a protectable ‘trade secret’ of a plaintiff and demonstration of ‘misappropriation’ by a defendant.” Utah Code § 13-24-2. An NDA helps a court rule in your favor but is not necessary. The NDA simply makes it easier to convince the judge that the employee misappropriated a trade secret.

InnoSys could have brought claims against Mercer independent of its NDA but would have face a much bigger challenge. With an NDA, InnoSys (and the Supreme Court) had a simple application of the definitions in the NDA to the information Mercer took. Without the NDA, another often difficult step is added: proof that the information was confidential and was provided to Mercer under circumstances showing it was confidential.

There are issues and nuances that cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about trade secrets, confidentiality agreements, protecting your rights, or rectifying wrongs committed against you, contact Utah attorney Ken Reich directly. Mr. Reich has represented both companies and individuals in business matters and disputes involving trade secrets, confidentiality issues, and enforcement actions. Using his many years of experience and backed by a firm of legal specialists in nearly every legal field, Mr. Reich can help you evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.