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If you are in business, sooner or later you may have an employee who leaves with the information learned working for you only to start competing for your customers. Properly created non-compete agreements can help protect against that risk and prevent, for a time, your former employees from soliciting your customers.
Non-compete agreement can also be effective in protecting trade secrets or confidential information. Also, if you purchase a business you should insist on a non-compete agreement from the seller to protect the good-will that you just purchased.
Arizona law recognizes the need to protect legitimate interests of employers, but also considers the need for an employee to earn a living. The restrictive covenants in non-compete agreements must be reasonable both in their duration and geographic scope. In other words, the restriction must be no greater than necessary to protect your business interest. Generally, this will be measured in how long it would take you to hire and train a replacement employee and allow them to develop the relationship with your customers. Other factors include the nature of your business and the uniqueness of the knowledge and information in the employee’s possession.
For a non-compete agreement to be an effective tool, it must be enforceable. A non-compete agreement that entirely prevents a former employee from pursuing a living in his or her chosen vocation will not be enforced. For example:
- A restriction that prevented mobile disc jockey employees from engaging in competitive activities for 2 years after termination within a 50 mile radius of Phoenix was unenforceable. The primary reason was because it only took 14 weeks to hire and train a new employee.
- A restriction that prevented a pest control employee from competing for 2 years in the entire Tucson metropolitan area was also not upheld because there was no showing of actual loss by the employer due to the fact there were 55 competitors and because the employer’s business was not unique.
- A non-compete agreement that prevented the former employee from competing for 6 months in the entire Phoenix metropolitan area, however was enforced because it was limited to a narrow industry mattress superstores and thus allowed the former employee to continue to earn a living in mattress sales, just not with a superstore.
When deciding on the geographic scope of a non-compete agreement you must consider that in the employment context, no Arizona court has upheld a non-compete agreement for the entire state of Arizona. The greater the geographic scope the less likely it will be upheld as it may prevent the former employee from earning a living. In the sale of a business, however, the courts are less likely to scrutinize a restrictive covenant preventing the seller from competing with the buyer. Restrictions for an entire county or city may be unenforceable as well unless you can demonstrate that your business has a substantial market presence in that area. Generally, the greater the geographic scope, the smaller the duration and vice versa. In Arizona, a duration longer than 6 months may not be enforceable absent proof that a longer period is necessary to hire and train a replacement. However, a non-compete agreement that prevented a veterinarian from competing for 5 years within a 12 mile radius of Mesa was upheld as reasonable. The longer duration was upheld because the geographic scope still permitted the employee to earn a living. Non-compete covenants can also be used to prevent, for a time, solicitation of your customers or employees. These covenants are often referred to as “anti-piracy” or “hands-off” provisions. These types of restrictions will generally be enforced as long as they are reasonable in their duration. However, in one case a state wide insurance agency was unable to enforce a statewide “hands-off” restriction when the employee sold insurance exclusively in Northern Arizona. Also, a non-solicitation provision likely will not be enforceable if it extends beyond current customers to former or potential customers. Another use of non-compete agreements is to protect trade secrets and confidential information. The agreement should contain confidentiality and non-disclosure provisions. Arizona has adopted the Uniform Trade Secrets Act, A.R.S. 44-401 et. seq., which defines a “trade secret” very broadly and provides protection against misappropriation. A trade secret is generally any information, formula or compilation of information that is used in business, not available to the public and gives you a competitive advantage. To protect your trade secrets you must take affirmative steps to identify and treat them as secrets. Courts will want to see what steps you took to protect your information, such as non-compete agreements, marking information “confidential,” restricting access and requiring the employee to return confidential information. If you don’t currently use these agreements or if you have not had yours reviewed recently, it may be time to meet with an attorney. Non-compete agreements drafted properly can be effective tools in protecting your business from unfair competition and preventing the unauthorized disclosure of confidential information or trade secrets. If you have any questions concerning contracts or any other legal disputes please call Rowley Chapman Barney, Ltd. at (480) 833-1113 and one of our business, contract or litigation attorneys will be happy to help you.