In my law practice, I’ve heard countless business owners declare that non-compete agreements are not enforceable. Well, it’s true…if they’re not properly written, they’re not enforceable. But non-competes have been the subject of numerous cases in Arizona, and through this body of case law, clear guidelines have been handed down regarding what constitutes an enforceable restriction.
What is a non-compete?
A non-compete agreement is a contract between an employer and employee that, following the employee’s termination, he or she will not engage in the same line of work that he or she performed for the company. The purpose, of course, is to protect the employer’s business in the aftermath of the departure of a worker who has skills and knowledge about the industry and the specific company and can successfully compete against their former employer, causing financial harm. Generally, there are restrictions related to the length of time and a geographic area within which the employee is precluded from engaging in the prohibited work, and if the employee violates the restrictions, the employer could sue them if their actions caused harm to the company.
What makes a non-compete enforceable?
The cases in Arizona have provided clear direction regarding the enforceability of the provisions in a non-compete agreement. Primarily, the restraints on the worker’s future actions must be reasonable and must be no broader than the employer’s legitimately protectable interests.
But what is reasonable? What is a legitimate protectable interest? In the 1979 Arizona case Gann v. Morris, the court said, “What is reasonable depends on the whole subject matter of the contract, the kind and character of the business, its location, the purpose to be accomplished by the restriction, and all the circumstances which show the intention of the parties.” In short, for non-competes, there is no ‘one-size fits all.’
Often employers will seek to restrict their former employees for as long as possible and in as large a geographic area as they can justify. In most cases, this will render the non-compete unreasonably broad and therefore invalid.
Regarding the time restriction, an employer should seek to restrict for only as long as necessary to replace the employee and give that replacement a chance to (1) prove he or she can competently do the job and (2) demonstrate his or her effectiveness to the company’s customers.
Regarding the geographic restriction, an employer should seek to only include those areas actually served by the company. Limiting the employee for a longer time frame or from working in an area not serviced by the company will most likely be considered overly broad.
By way of example, restricting a departing hairdresser from working within 50 miles of the salon for a two-year period would probably not hold up because the salon would not need two years to find a replacement and the market area served by the salon is probably substantially smaller than a 50 mile radius.
Additionally, an enforceable non-compete will only restrict the employee from performing the function that he or she performed for the company. If the employee previously worked in a sales capacity, restricting the employee from future work as an operations manager will not be valid.
What a non-compete cannot do…
In our free market society, Arizona courts recognize that a worker has the right to use the skills he or she has learned on the job in a new job. As such, restrictive covenants such as non-competes are generally not favored, and in a legal dispute, the burden is on the employer to prove the extent of its protectable interest.
A non-compete agreement, even if validly signed by both parties, cannot simply be a means for a company to eliminate competition if there is truly no valid interest to protect. A company cannot, therefore, impose a restriction on a worker that provides no benefit to the company beyond limiting competition.
What can you do?
As a business owner, you do have the right to protect your business and prevent your departing employees from competing against you…as long as your restrictions are legitimate and reasonable. Jimmy John’s found this out the hard way, by agreeing in 2016 to pay $100,000 in settlement for the unlawful agreement it required workers to sign, prohibiting them during their employment and for two years afterward from working at any other business within 2 miles of any Jimmy John’s shop in the United States that made more than 10% of its revenue from selling sandwiches.
Call me to find out how you can do it better! Click to schedule a meeting so that, together, we can ensure your business is protected.
NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.
By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
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