Things to consider when drafting non-compete agreements in Arizona
Under Arizona law, restrictive covenants are disfavored and are construed narrowly by courts. Arizona courts have long held that covenants not to compete are disfavored because they restrain trade and thus are strictly construed against employers. Companies should draft non-competition restrictions narrowly and any restraints upon competition should be designed to protect a legitimate business interest.
In Arizona courts, overbroad covenants can be blue-penciled but not rewritten (the blue pencil doctrine is a legal concept where a court finds that portions of a contract are void or unenforceable, but other portions of the contract are enforceable). The Blue Pencil Rule allows the legally-valid, enforceable provisions of the contract to stand despite the nullification of the legally-void, unenforceable provisions. This means that covenants may end up being unenforceable if they are determined to be overbroad and cannot be blue-penciled (i.e. there is no language in the contract which can act to replace the overbroad language). Employees who have substantial contacts and influence with customers and knowledge of business plans and metrics (such as senior executives, sales managers, higher level sales people, etc.) are more likely to have restrictive covenants enforced against them as opposed to less senior employees.
Furthermore, a recent Ninth Circuit decision regarding non-compete agreements found that restrictions upon competition fall within antitrust considerations and so before a court can consider whether there has been a breach of an agreement not to compete, it first must evaluate the propriety of the restrictions. In other words, if the restrictions are not necessary to protect a legitimate business interest, then the contract is unenforceable as written under anti-trust regulations/considerations. Seychelles Organics, Inc. v. Rose (9th Cir., 2017)
Non-compete agreements can be enforced in Arizona if they are reasonable in geographic limitation, time, and the activity prohibited. However, these tend to be the hardest restrictions to enforce. Non-solicitation or other agreements that protect customer relationships for a certain time period should be strictly limited to give the employer time to hire a replacement and have that new employee develop a rapport with those customers.
Oftentimes employers will try to make the restrictive time period much more broad than necessary, which results in an entirely unenforceable restriction (for example, six months may be considered a reasonable restriction where a year will be deemed overbroad and unenforceable). It is best to draft such restrictions with “step-down” provisions so that a court may cross out (blue pencil) a restriction that they determine to be overboard and still be able to choose a less restrictive (stepped-down) restriction. Such language would look something like this: The non-competition period shall mean a period of two years following the date of this Agreement, unless a court determines that two years is unenforceable under applicable law, in which case the Non-Competition Period shall be for the longest of the following periods that the court determines is reasonable and enforceable: eighteen months, twelve months, nine months or six months.
In Arizona, it is important to have updated restrictive covenants that are narrowly drafted to protect a company’s legitimate business interest. Relying on outdated or overly broad agreements can prove costly and can result in non-competition or non-solicitation agreements that are entirely unenforceable. Companies should also consider the employee’s role and their amount of contact with customers when determining the level of post-employment restrictions that are to be placed upon that individual employee.