One of the most common questions I get from business owners is whether or not Non-Compete Agreements are legal. Yes, in Arizona they are!
 
There’s a significant body of legal decisions in Arizona to guide us in drafting a Non-Compete that will be held valid if legally challenged at some point. Below are some of the major considerations, but first….
 
What is a Non-Compete?
 
A Non-Compete Agreement is a contract between an employer and employee (or between a hiring company and an independent contractor) that, following the worker’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.
 
But because this restriction can keep the worker from earning a living at their chosen profession for some period of time, the courts will not enforce a Non-Compete that contains unreasonable or overbroad provisions, meaning that the restrictions should only apply to the company’s “legitimate and protectable business interests.” But what does THAT mean?
 
Temporal Restrictions
 
Most Non-Competes define a time frame after the worker is terminated during which they cannot engage in competitive work. While a 2-year restriction might be reasonable for some workers, such as a high-level executive with access to a company’s most sensitive data, it will not be reasonable for a mid or low-level worker with limited knowledge of the company’s operations or confidential information. Your temporal restriction must be reasonable for the position, and generally should be no longer than required for the company to find a replacement worker and get that worker up to speed. A court will not view an unduly restrictive time frame as a legitimate and protectable interest.
 
Geographic Restrictions
 
Additionally, most Non-Competes specify a geographic area within which the worker is prohibited from engaging in competitive work. Of course, this is intended to prevent the company’s clients jump to a former worker’s conveniently located new company. In today’s business world, however, more and more companies have state-wide, national, and even international clients, making a Non-Compete that restricts the worker’s activity around the company’s location potentially irrelevant. 

If a Non-Compete is legally challenged, a court will want to enforce only the least restrictive terms needed to protect the company. For certain local businesses – medical or personal services, home repair, and the like – a geographic restriction may make sense, but not for companies whose clients are outside the local area. This is no longer a term that should automatically be included, but rather used strategically, where relevant.
 
If a geographic restriction does make sense, an employer should seek to include only those areas actually served by the company - and by the worker. Restricting the worker from working in an area not serviced by the company, or one in which the worker did not actually work, will most likely be considered overly broad. For instance, limiting a sales representative whose territory was the West coast from working for 1 year in a competitive business on the East coast may not be considered reasonable and protectible. 

So what’s the rule?
 
The “rule” is that there is no “one-size-fits-all” when it comes to Non-Competes. 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.” Clearly, every Non-Compete must be evaluated on its own.
 
Arizona v. other states
 
While Arizona courts have consistently recognized a business’ right to protect its interests after a worker leaves, the Non-Compete cannot simply be a means of eliminating competition. There must be a valid reason for any term that restricts an individual’s ability to earn a living.
 
Numerous other states have recently enacted laws prohibiting companies from requiring their workers to sign Non-Competes or limiting the restrictions that those companies can include in their agreements. Arizona has not yet done so, but the body of case law in our state clearly outlines the parameters for enforceability.
 
What should I do?
 
If you are a business owner with employees or independent contractors, it’s very risky to use a template Non-Compete Agreement or one with overbroad or unreasonable terms. You could be taking the chance that the entire agreement will be declared invalid (not just the offending provision). You have the right to protect your company – let me know how I can help! 

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
480-825-4509
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