As a matter of public policy, courts will not enforce contracts which unreasonably restrict trade. However, non-compete agreements — which restrict one party from practicing the same type of business for a certain amount of time or in a certain geographical area — can be enforceable, so long as the restriction is appropriate in terms of the scope, time and territory.
Non-competition agreements can be used to protect trade secrets, help small business owners avoid competition from employees they have trained and protect the goodwill of a business after a sale.
The enforceability of any non-compete agreement is highly dependent on the individual circumstances of the parties to the agreement and the provisions the agreement contains. A court will look to the reasonableness of any provision to deem whether it is enforceable. A court will consider:
- The type of business
- The particular circumstances of each party to the agreement
- The restriction does not interfere with public interests
- The restriction does not impose undue hardship on the party restricted
- Whether the restriction only protects the interests the party attempting to restrict competition, and not any more than necessary
An Arizona court has two options after deeming a restriction unenforceable. It can either strike down the entire agreement or “blue pencil” (cross out) the offending provision but leave the remaining agreement intact. Courts cannot rewrite a contract or add new terms, it can only cross out “grammatically severable, unenforceable contract provisions.” This is not true in all states, but is the law in Arizona.
An interesting new area of non-compete agreements involves “step-down” provisions. For instances where a court blue pencils the agreement, the contract would contain an alternative provision, presumably more reasonable, that would apply instead of the first, unenforceable provision.
For example, a non-compete agreement might attempt to restrict an employee from working in a certain field for three years. However, if the employee conteststhis provision as unenforceable, and the court agrees, the agreement would have an alternative provision (such as a 6 month limitation) that a court could find more reasonable.
Step-down provisions in non-compete agreements are a newly emerging area of Arizona restrictive covenant law, and it is not clear that an Arizona court would find a step-down provision enforceable. Noting this newly emerging area does, however, shed light on what may, or may not, be enforceable in a non-compete agreement.
This article is for informational purposes only, and anyone with questions, concerns, or the need to create or contest a non-compete agreement should not act on any of this information without first seeking professional counsel from a business attorney.