Non-Compete Agreements According to Arizona Law

Our company was recently served with a frivolous lawsuit seeking to enforce a non-compete agreement against my partner who is a former employee of the Plaintiff. The law on Non-Compete Agreements in Arizona is clear and is as follows:

Under Arizona law, a restrictive covenant will be considered unreasonable and unenforceable: "1) if the restraint is greater than necessary to protect the employer's legitimate interest; or 2) if that interest is outweighed by the hardship to the employee and the likely injury to the public." Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281 (Ariz. 1999). Generally, non-competition restrictive covenants are either reasonable and enforceable or unreasonable and unenforceable. However, "[i]f it is clear from its terms that a contract was intended to be severable, the court can enforce the lawful part and ignore the unlawful part." Olliver/Pilcher Ins. v. Daniels, 715 P.2d 1218, 1221 (Ariz. 1986).

As a result, Arizona courts have adopted the "blue pencil" doctrine as expressed in the Restatement (Second) of Contracts. See, Farber, 982 P.2d at 1286 ("Arizona courts will 'blue-pencil' restrictive covenants, eliminating grammatically severable, unreasonable provisions.") "Where the severability of the agreement is not evident from the contract itself, the court cannot create a new agreement for the parties to uphold the contract." Olliver/Pilcher Ins. v. Daniels, 715 P.2d at 1221.

First and foremost, the restraint placed on my partner by the non-compete agreement disallows him from working in any aspect of the web, anywhere in he world. Clearly, this does not protect a legitimate interest because the Company did not want to participate in the business path that we have chosen to pursue.

Additionally, the hardship to my partner in this particular case is extreme. Web related work is and his been my partner's business for over five years and he is only twenty one years old.

A problem that arises with the "blue pencil" rule is that the overbroad provisions are typically the geographic or temporal restrictions. See, e.g., Varsity Gold, Inc. v. Porzio, 45 P.3d 352, 356 (Ariz. App. 2002) (noting that the geographical provision in a non-compete agreement, which encompassed the entire state and contiguous states, was unreasonable, where the employee worked only in one portion of one city). Once a court strikes those provisions, there generally are no geographic or temporal restrictions at all, rendering the agreement overbroad per se and, therefore, unenforceable. In other words, courts following the blue pencil rule will not do anything more than strike overbroad provisions; they will not revise the agreement to be enforceable even if the agreement expressly authorizes the court to do so.

The geographical restrictions in the non-compete signed by my partner and the Plaintiff state that my partner cannot engage in the restricted work “anywhere in the United States or any other country.” Therefore, my parnter could only engage in this type of work on another planet. As seen in the above paragraph, Arizona courts find that limiting a person to work within an entire state is egregious and unenforceable, let alone the entire world.

Also, as seen above, an overbroad agreement is unenforceable.
Moreover, Arizona courts rigorously scrutinize geographic and temporal restrictions, as they will enforce only those agreements in which the "restraint does not exceed that reasonably necessary to protect the employer's business, is not unreasonably restrictive of the rights of the employee, does not contravene public policy, and is reasonable as to time and space." Bed Mart, Inc. v. Kelley, 45 P.3d 1219, 1221 (Ariz. App. 2002); see also, Bryceland v. Northey, 772 P.2d 36, 40 (Ariz. App. 1989) (suggesting, in dicta, that a reasonable temporal restriction should not exceed 14 weeks); Amex Distrib. Co., Inc. v. Mascari, 724 P.2d 596, 604 (Ariz. App. 1986) (asserting, in dicta, that a period of a few months is probably the maximum appropriate temporal restriction for a sales representative).

A non-competition clause is generally disfavored by the American legal system. Arizona is particularly harsh on the enforcement of restrictive covenants. In our particular case, our company (1) does not compete with the Plaintiff because we do not have clients, nor solicit any clients; (2) there is no legitimate interest being protected for the Plaintiff; (3) there is extreme hardship to my partner; (4) the temporal restriction is overbroad; and (5) the geographical restriction is overbroad.

Should you or your company be faced with a restrictive covenant in Arizona, analyze it carefully, reply with a letter indicating that the court will strike it down based on the facts and pursue ARS 12-349(c), ARS 12-347(a) and 44-2083 for sanctions against the Plaintiff and his counsel.