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The Enforceability of Arizona Non-Compete Agreements
Arizona courts do allow non-compete agreements but require any such restriction to be reasonable and not beyond what is necessary to protect a business interest.

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.

Reasonableness Standard

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.

Step-Down Provisions

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.

Keywords: Contracts, non-compete
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