In this second installment on restrictive covenants, we will focus on the enforceability of non-solicitation provisions in employment contracts. Non-solicitation clauses, like covenants not to compete and confidentiality provisions, are designed to protect employers by placing specific restrictions on an employee’s activities once the employment relationship ends. Non-solicitation provisions are essentially “anti-piracy” agreements that designed to protect the employer from a former employee specifically pursuing the employer’s customers.
Arizona’s General View On Restrictive Covenants. Generally, restrictive covenants are disfavored by Arizona courts. In interpreting this type of restrictive covenant, the judiciary strictly construes such clauses against the employer. However, the courts in Arizona will enforce a restrictive covenant “so long as it is no broader than necessary to protect the employer’s legitimate business interest.” Hilb, Rogal & Hamilton Co. v. McKinney, 190 Ariz. 213, 216, 946 P.2d 464, 467 (Ct. App. 1997). The standard for reasonableness is a fact-specific inquiry that takes into account the compelte circumstances. If the restriction is broader than the employer’s reasonable interest, creates undue hardship to the employee, or the harm incurred by the public outweighs the employer’s interest, then the restrictive covenant will not be upheld. Specifically, the restriction must be reasonable in duration and scope of activities limited.
Treatment Of Non-Solicitation Agreements. Non-solicitation provisions are primarily targeted at preventing former employees from soliciting customers, but sometimes also prevent former employees from soliciting other employees to move. In construing these covenants, courts have reasoned that a non-solicitation clause is reasonable only if it is limited to the time required for a new employee to demonstrate their capabilities to company’s customers. In Unisource Worldwide, Inc. v. Swope, 964 F.Supp.2d 1050 (D. Ariz. 2013) the court held that the non-solicitation agreement entered into by the employees of Unisource Worldwide, Inc., which prohibited them from soliciting any of Unisource’s customers, suppliers or employees for a period of 12 months was broad and ambiguous notwithstanding the specific time limitation provided therein. The court was especially concerned about the language stating that the prohibition on solicitation applies to any customer, supplier or employee with whom the employee had “material contact” in the last year of employment. The court stated that excessively broad language, such contained herein, does not provide clear direction to employees as to what type of conduct is prohibited. While in this case the court did not determine whether the non-solicitation was reasonable, it suggested that such a provision could prevent an employee from contacting a customer with whom he had no contact over the course of the employment relationship.
Distinguishing non-solicitation agreements from non-compete agreements. Non-solicitation agreements generally confer fewer limitations on employees and on the market as a whole than other types of restrictive covenants. Thus, Arizona courts have been more likely to find such antipiracy agreements enforceable where the contract does not restrict former employees from participating in their professions. In Alpha Tax Services, Inc. v. Stuart, 761 P.2d 1073 (Ariz. Ct. App. 1988), the court held that a covenant entered into by the employees of Alpha Tax Services, Inc, a company providing tax preparation services, not to solicit the tax business of the company’s clients after leaving the company is directly intended to prevent former employees from misappropriating information for the purpose of diverting customers from a former place of employment. In this case, solicitation of the customers of the company was not considered an ambiguous provision. The company’s former employees mailed fliers directly to the customers of their former employer announcing the opening of their new tax service offices and offering a discount for customers who sought their services. For these reasons, the court ruled that such a covenant was not unreasonable and should be enforced.
Stay tuned for future newsletters discussing Arizona law with respect to other types of covenants related to employment relationships.
Chernoff Law Firm handles complex business litigation matters, including employment disputes related to restrictive covenants. If you would like to discuss your case with an experienced business attorney, call our office in Scottsdale at 480-719-7307.
Written By: Louisa Kalish