Restrictive covenants, typically covenants not to compete, non-solicitation clauses, and confidentiality provisions, are supposed to allow an employer to give the employee all the information he or she needs to effectively perform the job while protecting the business from risks and competition after the employee leaves. Because the employee is restricted in how they can use valuable trade secrets, customer lists, or otherwise compete, the employer may feel safe in giving the employee full access to this information.
However, Arizona generally disfavors non-compete clauses and other restive covenants in employment contracts. Because these provisions may interfere with an employee’s ability to earn a living, courts will only enforce these covenants when they protect legitimate business interests and are narrowly drafted. The Arizona Court of Appeals analyzed a set restrictive covenants and found them overbroad in the case of Orca Communs. Unlimited, LLC v. Noder, 233 Ariz. 411, 314 P.3d 89 (App. 2013).
Orca v. Noder
Ann Noder served as president of Orca Communications, a public relations firm, for seven years. Noder agreed to several restrictive covenants as part of her employment, including a non-compete clause. The non-compete prohibited Noder from providing conflicting services within the restricted territory, which was defined as the largest of several areas that a court would find enforceable. These areas ranged from all fifty United States and the District of Columbia to within 10 radial miles of Orca’s Phoenix offices.
“Conflicting services” was defined as “any product, service or process of any person or organization other than The Company, which directly competes with a product, service or process with which Employee works directly or indirectly during [her] employment with The Company or about which Employee acquires Confidential Information during Employee’s employment with The Company.” The non-compete was effective for 18 months, but contained step-down provisions of 15, 12, 9, or 6 months if a court determined that the 18-month period was unenforceable.
Noder attempted to negotiate to buy Orca Communications, but the negotiations ended unsuccessfully. Noder then notified several potential customers of Orca that she planned to leave and start her own company, Pitch Public Relations. Orca filed a lawsuit against Noder alleging various counts, including a breach of the restrictive covenants. The trial court granted a motion to dismiss by Noder, which was appealed by Orca.
When Restrictive Covenants Are Enforceable
The Arizona Court of Appeals noted that restrictive covenants are generally disfavored and will be construed strictly against the employer. A restrictive covenant is unreasonable and will not be enforced when either (1) the restraint is greater than necessary to protect the employer’s legitimate business interests or (2) that interest is outweighed by hardship to the employee and public policy. If the non-compete protects more than the employer’s legitimate business interests, it is over broad and unenforceable, and Arizona courts will not rewrite it to make it enforceable.
Legitimate Business Interests
The court noted that there are legitimate business interests in protecting valuable trade information and customer relationships. However, a restrictive covenant cannot be designed to prevent a former employee from using skills and talents learned on the job.
The court also stated that the protectable interest in customer relationships only applied to current customers, not former or potential customers. There must be a temporal and geographic limitation to the non-compete in order for it to be reasonable.
In Orca, the court found the definition of “conflicting services” went far beyond protecting its legitimate business interests. Instead, the non-compete essentially prevented Noder from doing any work in public relations that used her skills and talents.
All of the restrictive convents were deemed unenforceable in the Orca case. The Arizona Supreme Court later depublished portions of the case that were unrelated to the restrictive covenants.
Public Policies Against Non-Competes
The court did not discuss the second prong of the reasonableness test, which examines hardship to the employee and public policy. This prong is a particularly important considered for doctors and some other professions because the public has an interest in being able to choose their own doctors. A non-compete for employees in some professions should be even more carefully drafted due to the interest of the public in having access to these services.
When drafting a restrictive covenant in an employment agreement, the non-compete should serve to protect a specific business interest of the employer, and be no broader than necessary to achieve this purpose. Consult with an experienced business attorney to learn more about how to protect your confidential information without exceeding the limits of Arizona employment law.
Non-Solicitation and Confidentiality Clauses
Other common means of restricting employees from competing after they leave are restrictions on soliciting customers, and prohibiting use of confidential business information. Watch for our newsletters over the next few months covering these issues.
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.