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 You Need Help with Affordable Care Act Reporting?

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Canyoneering in Southern Utah

Reporting on offers of health insurance coverage by Utah employers under section 6056 of the Affordable Care Act (ACA) is first required in early 2016 with respect to calendar year 2015. If you find yourself in this situation, my partner, Chris Droubay, has experience and expertise in this area. I am confident he can provide valuable assistance to you. Feel free to call him and tell him I sent you.

If you want to research it yourself and take a shot at getting it right on your own, the IRS has some online guidance, for whatever it’s worth, for completing the Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, at the Employer Information Reporting FAQs for Forms 1094-C and 1095-C on IRS.gov. If you are a large employer per IRS guidelines, the IRS has information available on its large employers page. Good luck!

ACA reporting is one of those areas that I simply have no expertise. Fortunately, I have partners who have the expertise. As with all legal issues, if you have questions, you should get specific legal advice. If you would like to talk to me about this or any legal matter, contact me, Utah attorney Ken Reich directly. I will likely ultimately involve a partner in the matter but I would love the opportunity to help out where I can. 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. Cheers!

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 Property Law- What to Do About Annoying Neighbors

IMG_4011Do you have a neighbor whose conduct is reducing or barring you from enjoying your own property? A nuisance claim may be the answer to your problem.

Nuisance law is alive and well in Utah and modern courts. The problem, however, is its relative complexity.

“There is perhaps no more impenetrable jungle in the entire law than that which surrounds the word ‘nuisance.’ ” W. Page Keeton et al., Prosser and Keeton on the Law of Torts (Prosser on Torts ) § 86, at 616 (5th ed.1984).

There are two kinds of nuisance, public (see Utah Code Ann. § 76–10–803) and private (see Utah Code Ann. § 78B-6-1101). Bear with me for a moment while I give you the gist of these claims. I am not trying to provide a treatise on nuisance but to give you enough information to determine whether you should look into it further if you believe it applies to your circumstances. Once you see the elements of the claims, I will show you the claims in action.

Public Nuisance

“A public nuisance is a crime against the order and economy of the state….” Utah Code Ann. § 76–10–803. Here are the four elements to prove a public nuisance:

  1. “Unlawfully doing any act or omitting to perform any duty,”
  2. The “act or omission … in any way render[ed] three or more persons insecure in life or the use of property,”
  3. You “suffered damages different from those of society at large,”
  4. Your neighbor caused or is responsible for the nuisance complained of; and
  5. Your neighbor’s conduct was unreasonable.

Note: ‘your neighbor’ could be a person, business, or government entity.

Private Nuisance

“The essence of a private nuisance is an interference with [an individual’s] use and enjoyment of land.” W. Page Keeton et al., Prosser on Torts § 87, at 619 (5th ed.1984). (On a side-note, if you are at all interested in wrongs or torts, find a copy of Prosser on Torts. It’s the bible of torts). Here are your three elements to prove a private nuisance claim:

  1. A substantial invasion in the private use and enjoyment of land
  2. caused by your neighbor or for which your neighbor is responsible, and
  3. the invasion is either (a) intentional and unreasonable, or (b) unintentional and otherwise actionable.”

Simply, a private nuisance focuses on whether you have suffered an ‘unreasonable injury.’ Meaning, is your injury of the kind that a person would not be reasonably expected to endure (making it ‘otherwise actionable’)?

Nuisance Applied

A few early cases provide great examples of how nuisance can be used to curtail problematic neighbors:

Right to clean air: Walter v. Selfe (1851), 29 L.J.R. (20 N.S.) 433 (Ch.) Selfe manufactured bricks on his property in the English countryside. His neighbor, sued to stop the brick manufacture and objected to the smoke, vapor, and “floating substances.”

The judge found that the brick burning was a legal nuisance. He enjoined further brick burning, finding that the neighbor was entitled to “unpolluted and untainted air” which he described as “air not rendered to an important degree less compatible, or at least not rendered incompatible, with the physical comfort of human existence – a phrase to be understood of course with reference to the climate and habits of England.”

Inappropriate residential use: William Drysdale v. C.A. Dugas (1896), 26 S.C.R. 20: In Montreal, Drysdale constructed a livery stable 25 feet away from Dugas’s home. Of course, the stable stank and its 30 noisy horses disturbed Dugas. Dugas’s nuisance action prevailed and proved damages for discomfort and reductions in tenant rents.

Trees may or may not be a nuisance: Cannon v. Neuberger, 268 P.2d 425, 427 (Utah 1954). Cannon sued Neuberger, his neighbor, to require him to remove trees to “control their growth as to keep their branches from overspreading, or the roots from permeating, or the leaves, twigs and branches from falling or being blown upon his lot…” Neuberger was ordered to cut 20 feet off the top and remove dead wood from his trees to reduce the risk of wind-blown and broken branches. Cannon wanted more and the Utah Supreme Court denied further relief stating:

To hold trees to be nuisances . . . merely because leaves or twigs or even branches in the ordinary course of affairs may be blown from them onto neighbors’ lots, would be to condemn to abolition all shade trees in communities sufficiently settled to have perils of such experiences. Cannon.

So, trees are a question mark. They are desirable and somewhat protected but also must be reasonably controlled.

Appropriate use of property: Hatch v. W.S. Hatch Co., 283 P.2d 217 (Utah 1955). Hatch sued his brother and neighbor W.S. Hatch for using his property as base of operations for his road-building business, vehicle garage, and maintenance facility. This was held not a nuisance because the ‘neighborhood’ was more like an industrial park that included: the main line of the Union Pacific Railroad (42 trains passing 195 feet from Hatch’s house every 24 hours) with flashing lights and signals; a petroleum plant, refinery, and a catalyst cracker; two racks for loading tank trucks with oils; and two other semi-truck service garages. Not a nuisance because his use fit the neighborhood- even though it was loud, dirty, and obnoxious.

A nuisance claim may be your friend if your neighbor is making your life difficult. Take a look at the elements of a nuisance claim and the examples above. Nuisance claims can require a complex bit of legal wrangling. I do not recommend attempting it on your own. If you have questions, you should ask them- contact me, Utah attorney Ken Reich. I regularly represent companies and the individuals and families that own them. My job is to know and understand my clients and their goals. Together with the right legal experts, I can help you get the result you want.