Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Arizona
Arizona courts have determined that restrictive covenants are enforceable if the terms are no broader than necessary to protect certain business interests of the employer. Employers have legitimate interests in protecting their customer relationships, confidential information and trade secrets. Factors considered when determining reasonableness include the former employee’s ability to earn a living and reasonableness in terms of duration and geographic scope.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Arizona courts have determined that, in the case of a written at-will employment relationship, the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. The courts have not addressed the situation in which there is no written employment contract.
Reasonableness in Time and Geographic Scope
The Arizona Supreme Court has determined that a restriction will not be enforce if the restriction is greater than necessary to protect the employer’s legitimate interests or if the hardship to the employee outweighs that interest. If a court finds and agreement is unreasonable, it may use the what is known as the “blue pencil rule” and simply cross out the offending part of the agreement. If the remaining part of the agreement is not enforceable on its own, then the court must strike down the entire agreement.
Examples of non-compete agreements that Arizona courts have found to be reasonable include:
- A 6-month restriction on a former employee from working in any business for which the sale of mattresses accounts for more than half its business within 10 miles of any of the former employer’s businesses.
- A 3-year restriction on a surgeon from practicing within 5 miles of the three offices of the former employer. The court modified the agreement to allow the surgeon to treat his patients seeking emergency care at hospitals within the restricted area and to allow him to continue as physician to a high school team.
- A 1-year restriction on a disc jockey from becoming employed or associating with any radio station within 50 miles of the city of his former employer.
- Within an agreement between financial services company and one of its executives that included three possible time periods for the restriction, the court determined that 1 year was sufficient time for the employer to hire and train his replacement. This agreement was deliberately drafted with the “blue pencil rule” in m ind. The court simply deleted the 18-month and 2-year options for the restriction.
The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:
- A geographic term prohibiting competition anywhere in the state and its contiguous states when the employee had only worked for the employer in part of one city and the employer had no active sales representatives anywhere else in the state.
- A restriction against contacting a particular former customer where that customer had terminated its business before the employee’s termination of employment.
- A 2-year restriction on former disc jockeys when the training of new disc jockeys only took 14 weeks and there was no other protectable legitimate business interest.
- A statewide restriction on an insurance salesperson was determined not reasonably necessary to protect the insurance agency’s business and unreasonably restricted the employee’s right to work in his chosen field.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.