Why are non-compete and non-solicitation provisions in employment contracts disfavored by Courts.
A non-compete or non-solicitation can allow an employer, franchisor or other party to act like a negotiation bully because the employee’s critical ability to walk away from a bad deal is significantly curtailed. Courts are reluctant to interfere with an employee’s right to work, unless the NCA meets the state’s legal requirements. Non-compete agreements are used by many businesses to try to keep talent and know-how from walking out the front door and heading to a competitor. Footnote 1
Shouldn’t I, as an employee, have the freedom to leave and work for anyone I choose, unfettered?
Not necessarily. In Arizona, The Courts review the following factors:
- Is there a legitimate business interest being protected by the non-compete?
- Did the employee receive any benefit for the agreement?
- Is the agreement reasonable in time and scope?
- Does the agreement violate public policy?
What are the benefits of Non-Compete Agreements for Employers?
- They can protect an employer’s business from unwanted employee turnover
- They can help to protect the company’s confidential business information including trade secrets and other sensitive business information
What are the benefits of Non-Compete Agreements for Employees?
Employee ideally receives extra consideration in the form of increased pay or benefits for signing the agreement. If the agreement is presented and signed prior to employment, employers may argue, it was part of the deal. There is a better argument when an employer requires 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. Courts will not always require extra consideration.
What are some common grounds upon which non-compete agreements are challenged and defeated?
- Agreement is unenforceable because it restricts competition in an unreasonably large territory.
- Agreement is unenforceable because it restricts competition for too long.
- Agreement is unenforceable because it is boilerplate or ‘one size fits all’ and thus is not properly tailored to fairly address the situation.
- Agreement is unenforceable because there is no or insufficient consideration (Employer has not provided employee anything of significant value in return for his NCA commitment)
- Agreement is unenforceable because it allegedly arose out of the sale of a business or the assets of a business, but purchaser (new employer) did not properly protect its rights relating thereto. Closely related to this is whether proper assignments were executed if the original employer is not now the enforcing party.
- Agreement is not enforceable because it does not fulfill a legitimate business purpose. The court will always look to the concept of whether there is a good business reasons for asking an employee to sign the agreement. Common legitimate purposes may be to allow sufficient time to train new employees, to protect trade secrets and to protect customers or pricing information.
- Agreement is not enforceable because it has not been properly updated or amended since its execution and circumstances underlying or law controlling may have changed.
- Agreement is not enforceable because of certain choice of law provisions which dictate against the employer. NCAs generally have a provision establishing the which jurisdiction laws will govern the agreement.
There are various other grounds which may pertain in your case. We are happy to discuss your case with you to help you assess your rights. Footnote 2
Is there a difference between a Non-Compete Agreement and a Non-Solicitation Agreement?
A non-solicitation agreement which is sometimes referred to as an ‘anti-piracy agreement’ is an agreement by an employee not to solicit the customers or clients of his former employer for a set period of time after his employment commitment ends. Alpha Tax Servs., Inc. V. Stuart, 158 Ariz. 169, 171 (Ct. App. 1988) An employer may not enforce a post-employment restrictive covenant simply to eliminate competition per se. The limitations placed by a restrictive covenant on a former employee’s competitive activities are carefully scrutinized by the courts. A restrictive covenant which generally prohibits competition is too broad because all that is reasonably necessary is to protect the former employer from solicitation of its customers. The burden is on the party wishing to enforce the covenant to demonstrate int that the restraint is no greater than necessary to protect the employer’s legitimate interests and such hardship is not outweighed by the hardship to the employee and the likely injury to the public. Valley Medical Specialists, 194 Ariz. 363, 372, 982 P.2d 1277, 1286
In many instances, “solicitation” is expressly defined in the agreement. Generally, to “solicit” a former customer or client means to interact with the customer or client in a manner that would encourage him or her to leave the former employer and engage the employee. Ordinarily notifying former customers or clients of the employee’s new employment, such as advertisements or e-mail announcements, is permitted as long as the notification does not include a solicitation.
If a person signed a non-compete agreement several years ago, does it remain enforceable or is there a time when its provisions become stale and unenforceable?
It all depends on the terms of agreement, whether they may have expired and if they are arguably still in force, what conclusions the factual and legal analysis will dictate.
I signed a non-compete agreement several years ago. Now I want to start my own competing business. How should I move forward?
This kind of situation requires factual and legal analysis to determine the feasibility of what steps/precautions should be taken.
If a person buys a business, should he or she have a non-compete agreement?
Definitely. The purchaser of a business should secure an NCA from the Seller, particularly relating to its key personnel. Key personnel of the Seller usually have strong customer relationships, skills and know-how which should be protected by the Purchaser in the acquisition.
What if a non-compete agreement or non-solicitation agreement I signed has a choice of law?
The enforceability of non-compete and non-solicitation agreements vary dramatically from state-to-state. For this reason, prudent employers often attempt to maximize the enforceability of their agreements by expressly providing in the agreements that they are governed by the law of a state with favorable law. As a prospective employee, you should know which state law will govern your agreement and what the specifics enforcement provisions of that law will be relating to your agreement.
Footnote 1: Certain of the ideas set forth above were based upon an article by MacElree Havey in its article The Top Ten Mistakes with Non-Competition Agreements, https:/www.macelree.com/top-10 mistakes-with-non-competition-agreements/