A common issue for employees and employers in today’s workplace is non-compete agreements. Many employers require that all, or certain key employees, sign agreements that prohibit employees for working for a competitor for a period of time after the employee leaves the job. People often wonder whether such agreements are enforceable, especially because Arizona is a “Right to Work” State. While Arizona is a Right to Work State, that law does not have any effect on non-compete agreements. Rather, Arizona Courts have developed a standard to determine whether a non-compete is enforceable. This article will discuss some of the reasons that an employer may require a non-compete agreement and the enforceability of such agreements.
While a non-compete agreement can keep an employer’s business from losing employees, it can also protect the company’s confidential information. If employees have access to sensitive business information or trade secrets, the company will want to prevent the employees from disclosing this information to competitors.
A trade secret is information that gives your company a competitive advantage because it is not generally known and cannot be readily learned by other people who could benefit from it. It can be a formula, pattern, compilation, program, device, method, technique or process that you have made reasonable efforts to keep secret. When an employee with access to trade secrets leaves — either because the employee quit or has been fired — he could take this information and use it to his personal advantage (and at the employers expense). For example, a former employee may open a competing business or may go to work for a competitor and unwittingly or deliberately divulge your hard-won keys to success. A properly drafted non-compete agreement can keep this from happening.
While non-compete agreements are an effective way to protect your business’s trade secrets, Arizona Courts look closely at whether the non-compete agreement should be enforced given the impact the non-compete will have on the employee. To be enforceable the Court will look at the following factors: 1) is there a legitimate business purpose for the non-compete; 2) did the employee receive any benefit for the agreement; 3) is the agreement reasonable in time and scope; and 4) does the agreement violate public policy.
The first factor considered is whether there is a good business reason for asking an employee to sign the agreement. Some common reasons for requiring an employee to sign a non-compete are protecting trade secrets, protecting customer or pricing information, or having sufficient time to train new employees.
For the non-compete to be valid the employee must receive a benefit for signing the non-compete. If the agreement is presented prior to employment this issue is reduced as the employee would receive a job for signing the agreement. However, it is often wise to provide something additional to ensure that the employee receives consideration for signing the agreement. It’s more important when requiring an existing employee to sign a non-compete that the employee receive a benefit. Generally, giving the employee a promotion, raise, or bonus for signing the agreement will be sufficient.
The non-compete agreement must also be “reasonable” in time and scope. There is no magic number or definition of what is “reasonable.” Rather the Court will look at the facts and circumstances of the job and the non-compete to determine if the agreement is reasonable.
The first factor the court looks at to determine reasonableness is the length of the non-compete. The Court will refuse to enforce an agreement that is longer than necessary. What is necessary will again be very specific to the particular job or industry. While there is no set rule, non-competes ranging from six months to one year are generally considered “reasonable.” However, you should be very careful in drafting the non-compete for your particular business and make sure that whatever length you choose can be supported by your business needs.
The Court will also look to make sure the scope of the non-compete is reasonable. Scope includes both the geographic area involved and the type of work that is prohibited by the non-compete. Again, care should be taken to make sure the geographic scope is no broader than necessary to protect the company’s business. For some businesses a geographic scope that is countrywide may be reasonable, while for other business a one mile radius is all that is reasonable. Again, this will depend upon the particular job and industry.
The final factor Arizona Courts look to is whether the non-compete is against any public policies. For example, a Court is not likely to enforce a non-compete agreement if it completely eliminates a person’s ability to work in their chosen profession or if it places an undue financial prejudice on the person. Also, for certain profession, such as doctors or other medical providers, courts are more likely to refuse to enforce non-competes because of the public policy in allowing people to choose their own doctors.
While this article provides a general overview of non-compete agreements there are additional factors that need to be considered and you should not rely exclusively on this information when evaluating a non-compete agreement. If you are dealing with a non-compete agreement it is best to consult with an attorney who is knowledgeable about this area of the law.