Are non-compete agreements enforceable in Arizona?

Contracts that restrict free will and economic activity are generally disfavored by the courts because they smack of slavery. Non-compete agreements (NCAs) are somewhat of an exception to that general rule. NCAs are essentially employment contracts that limit an employee’s ability to work at a similar company or in a designated geographic area for a certain amount of time after leaving their current position.

Courts are recognizing that today’s employees are much less likely than past employees to remain in one job for their entire career, and are thus willing to offer employers reasonable protection from competition from past employees.

Courts generally want NCAs to have clear and reasonable provisions. 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. In determining reasonableness, a court will consider:

The type of business. More specialized businesses, or businesses that have trade secrets to protect, are more likely to have their NCAs upheld.
The particular circumstances of each party to the agreement. For example, the court will often look at whether the NCA was negotiated or if the employee was told they could either accept it as written or work somewhere else. If the NCA was negotiated, the court will be more likely to try to determine the parties’ intent when they wrote the contract.
Whether the restriction interferes with public interests. Just who is protected and who is harmed by the NCA’s terms?
Whether the NCA imposes undue hardship on the party restricted. Will the employee be able to find a new job not barred by the NCA with reasonable ease?
In Arizona, a court has two options if it determines that a particular NCA restriction is unenforceable. It can either strike down the entire agreement or cross out unreasonable provisions while leaving the NCA as a whole intact. Striking out unreasonable provisions is known as “blue penciling.”If a court decides to blue pencil a NCA, it can only cross out “grammatically severable, unenforceable contract provisions.” Courts cannot rewrite a contract or add new terms.

In order to be proactive with regards to the court system’s proclivity for blue penciling, many NCAs drafted today include step-down provisions. Adding a step-down provision can prevent a court from striking a key provision by providing a more reasonable alternative. An example of this would be, “This non-compete agreement will be in place for 12 months after the employee leaves the company. If a court finds this duration to be invalid, then the duration will be 9 months after the employee leaves the company. If a court finds this duration to be invalid, then the duration will be 6 months after the employee leaves the company.”A valid step-down provision will only have 2 or 3 choices and be written in good faith.

Before going to court to challenge a NCA, employees and employers should note that Arizona is a loser pays state when it comes to contract disputes. Because disagreements over NCAs can be considered contract disputes, someone who wishes to challenge or enforce an NCA must be ready to comply with the court’s ruling and pay the winning party’s court costs.

If you are a business owner who finds themselves in a dispute with a former employee for violating a non-compete agreement, you need the help of an experienced business litigation attorney. The attorneys of Nirenstein Garnice PLLC have represented executives and owners throughout Scottsdale and can help you resolve your dispute in a cost effective manner that benefits the financial and structural well-being of your business. Contact us today at (480) 351-4804 to schedule your free consultation.