When employees move on to other pursuits, they take their knowledge of the former employer with them. If you are a business owner, a well-drafted non-compete agreement can ensure that former employees do not directly compete with your business.
Because many employees leave to work for competing firms (or start their own), a non-compete agreement is essential to protect, at least for a time, what you have worked so hard to build. A business must draft its non-compete agreement in such a way that it will protect itself to the greatest extent possible, but also remain legally enforceable. Creating such an agreement often involves a delicate balancing act that a business must constantly keep in mind.
As Arizona is considered a right to work state from an employer’s perspective, on the other side of the coin Arizona law favors the right for an employee to change employment with few limitations. In general, non-compete agreements in Arizona “are disfavored and thus are strictly construed against employers.” Hilb, Rogal and Hamilton Co. of Ariz., Inc. v. McKinney. For example, to be enforceable, non-compete agreements in Arizona must include reasonable time and geographical limits.
What courts consider “reasonable” is generally determined on a case-by-case basis and an analysis of the facts of each specific scenario. However, certain guidelines have been established. Arizona courts have held that these limitations must be specifically tailored to protect an employer’s legitimate business interests. For example, in Valley Med. Specialists v. Farber, the Arizona Supreme Court held that non-compete agreements will be enforced as long as they are “no broader than necessary to protect the employer’s interest.”
Non-compete agreements that attempt to impose lengthy time restrictions and overly broad geographical limitations will not be enforceable. As an example, no court in Arizona has ever upheld a non-compete agreement that imposed a statewide geographical limitation. In Liss v. Exel Transportation Services, Inc., the court ruled that a non-compete agreement essentially banished an employee from his chosen industry. The agreement prohibited the employee, a truck driver, from “directly or indirectly engaging in any work associated with motor freight transportation services for three years, regardless of where the business is located.” Unsurprisingly, the court held that the agreement was overly broad. Therefore, employers must carefully draft these agreements to balance their business interests against their employees’ right to earn a living.
Arizona courts will consider a number of additional factors when examining the scope of time and geographical limitations. Among these other factors, the court will examine the type of business, the employee’s specialized knowledge, and how long it will take an employer to train the employee’s replacement.
For example, in Amex Distributing Co., Inc. v. Mascari, the court held that a 36-month blanket restriction that prohibited the employee from working with any competitor was unreasonable. The court stated: “When the restraint is for the purpose of protecting customer relationships, its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness.”
In Bryceland v. Northey, the court also refused to enforce a non-compete that included overly broad time and geographical limitations. Not only did the agreement prohibit a disc jockey from providing professional services to any client within a 50-mile radius of Phoenix or any of his other job sites, it did so for two years. Similarly, in Lessner Dental Labs v. Kinney, the court held that a non-compete was unenforceable because it prevented the employee, a dental technician, from working with any competitors within the entire county for two years.
However, when the limitations are considered reasonable in time and distance, an Arizona court will enforce the agreement against the employee. As an example, in Bed Mart, Inc. v. Kelley, the court held that a non-compete agreement was enforceable. The agreement imposed a six-month, 10-mile restriction on the employee working for any company whose business was comprised of more than 50 percent mattress sales.
Contrasting Bed Mart with examples where the non-compete agreement was determined to be un-enforceable, it is easy to see the differences in how the geographical and time restraints were drafted. Because the non-compete provisions in the Bed Mart agreement were specifically and narrowly tailored to protect the employer – without being unduly burdensome to the employee – the court determined them enforceable.
Often employers attempt to utilize a “one size fits all” non-compete agreement that fails to focus on the unique nature of their business, the specific knowledge and skill set of certain employees, and whether the geographic and time limitations within these boilerplate agreements would be considered reasonable. This is an area where a “one size fits all” approach can be detrimental to an employer’s ability to enforce an agreement and emphasizes the need to specifically draft a non-compete agreement to an employee’s skill set.