by Garrett J. Olexa, Jennings, Strouss & Salmon, P.L.C.
It is not uncommon for an employer to decide to have existing employees agree to a covenant not to compete to preclude departing employees from working in the same business for a period of time after they leave the company. Likewise, companies frequently ask employees to sign non-solicitation agreements to preclude them, for a period of time after they leave the company, from soliciting the company’s customers or from soliciting its current employees to come with them. In Arizona such agreements are legal and, if properly and narrowly drafted, enforceable.
For a non-compete or anti-solicitation agreement to be enforceable it generally must protect some legitimate interest of an employer beyond the desire to protect itself from competition. A restriction is considered unreasonable and will not be enforced if the restraint is greater than necessary to protect a legitimate interest of the employer or if that interest is outweighed by the hardship to the employee and likely injury to the public. Thus, what the Arizona courts consider to be a reasonable restrictive covenant is a fact intensive inquiry that requires an analysis of all of the circumstances.
A short checklist of some important factors to consider include the following:
Is there consideration?
That is, have there been either mutual promises, including the promise of future employment, or alternatively, has there been a bonus or increase in pay if the covenant comes after the start of employment?
Is the scope of the restrictive reasonable in terms of the type of work?
The type of work is often a critical factor to assessing enforceability. For instance, a non-competition provision may be invalid if it fails to limit itself to the scope of the type of work performed by the employer. If a medical practice specializes in cardiology, a restrictive covenant that fails to limit itself to that area of specialty would likely be invalid. A proper restriction should also limit itself to the type of work performed by the employee.
Further, public policy concerns will sometimes outweigh the otherwise protectable interest remaining members may have and thus dictate special protections for certain professions. For example, Arizona courts have recognized that the doctor-patient relationship is special and entitled to unique protection, in part because it is believed that patients should have free choice of which doctor they see and free competition helps promote optimal care. The foregoing, in turn, impact the validity of restrictive covenants placed on medical professionals. Similarly, the ethical rules governing attorneys prohibits a lawyer from making or entering a partnership or employment agreement that restricts the lawyer’s right to practice after termination of the relationship.
Is the duration of the restrictive covenant reasonable?
An additional critical factor is whether the time period for a restrictive covenant is reasonable. This factor too will often depend on the specific job and trade. One question often posed to determine whether the time aspect of the restriction is reasonable in length is how long will it take your replacement to get up to speed and work effectively for the employer?
Does the restrictive covenant contain a reasonable geographic limitation?
A non-compete provision is also often required to give a clear indication as to its geographic scope. Depending on the nature of the business that geographic restriction may be as narrow as a few miles or as broad as the vast parts of the country. If a company does not do business outside of Arizona, a non-compete outside of the State may be found to be overly broad and therefore unenforceable.
With respect to non-solicitations provisions that limit an employee’s ability to solicit the company’s customers, a reasonable provision will generally be limited to those customers with whom the employee did business or had developed a relationship with and to current customers of the company, not former customers.
Because the enforceability of restrictive covenants are often driven by facts specific to a particular employee’s position and state-specific laws, national companies should be cautious about using a single form agreement for all employees in all States. To ensure that restrictive covenants are enforceable, employers should check the laws of the State where the employee is doing business and tailor the proposed restriction narrowly in accordance with the factors discussed above.