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.

Marital Interest in Husband’s Company Is Subject to Wife’s Claim Even If Divorce Decree was Not Entered Before Bankruptcy Filed.

In this case Husband filed for Chapter 7 bankruptcy, while the parties were in divorce proceedings. No final judgment existed nor was there a division of marital assets. Based on an estimate of her expected share of marital assets, Wife filed a timely proof of claim for one-half million dollars against Husband’s bankruptcy estate, apparently premised on her stake in a partnership that was legally titled in Husband’s name and, therefore, passed to his bankruptcy estate.  It would likely be distributed as shared marital property in a divorce decree.

The trustee sought to expunge the claim, arguing that Wife’s interest in equitably dividing marital property in Husband’s bankruptcy estate was not a “claim” under 11 U.S.C. 101(5), because the state court had not entered a final divorce decree before his bankruptcy filing. The bankruptcy judge found that the claim for equitable distribution arose prepetition and must be allowed.

On direct appeal, the Federal Court affirmed, indicating that although Wife did not have an equitable distribution decree in hand at the time Husband filed for bankruptcy, the focus should not be on when the claim accrues, but whether a claim exists. Given the Bankruptcy Code’s expansive definition of “claim,” a non-debtor spouse has an allowable pre-petition claim against the bankruptcy estate for equitable distribution of marital property when the parties are in divorce proceedings before the bankruptcy petition is filed.

Since the threat of a bankruptcy filing often is raised in a divorce case, this type of analysis proves very helpful if you are the spouse whose soon to be ex is threatening to file so that your chance of obtaining value is denied or severely limited.


Former Married Couple Litigates Money Loaned to Their Business By Relative After Their Divorce Finalized

By Alexander Nirenstein, Nirenstein & Garnice PLLC

The Court of Appeals this week in Stewart v. Sterling dealt with the issue of a married couple who formed a business, borrowed money from the wife’s relative for start-up costs, and were later divorced with the husband being awarded the company and without those monies being repaid at the time the divorce was finalized.

Ultimately, the relative sued the ex-husband claiming breach of contract, breach of covenant of good faith and fair dealing and unjust enrichment.  The ex-husband defended the lawsuit claiming that there was never any agreement to repay the money.  At trial, judgment for the full amount borrowed, with interest at the statutory rate and attorney’s fees and costs was entered in favor of the relative.

The Court of Appeals affirmed the trial court’s ruling finding that no enforceable contract existed because it was only an “oral debt not evidenced by a contract in writing” existed.  Nevertheless, the Court held that the trial court properly found that the claim for unjust enrichment was appropriate.

In Arizona, in order to establish a claim of unjust enrichment, a party must show: (1) an enrichment; (2) an impoverishment; (3) a connection between the enrichment and the impoverishment; (4) the absence of justification for the enrichment and the impoverishment; and (5) the absence of a legal remedy.

These factors were proved by the relative, including, “absence of legal remedy” since there existed no enforceable contract between the parties.  As a result, timing as to when the law suit was filed became critical because of statute of limitations concerns (three and/or four years).  In this case, the “discovery rule” applied, which indicates that a “cause of action does not accrue until the plaintiff knows or with reasonable diligence should know that facts underlying the cause.”

The trial court’s application of the date when the cause of action accrued in this case was the date of the entry of the Decree of Dissolution of Marriage, “the time [the relative] should have know that the ex-husband was responsible for repayment of the loan and that payment would not be made.”







How a Divorce Can Impact your Business

By Alexander Nirenstein, Nirenstein & Garnice PLLC

Featured Article in Scottsdale Airpark News

When a principal in a closely held business goes through a divorce, there are serious implications for the business as well as for the individual. Here are several questions to consider.

Separate Property or Community Property?

The first consideration is whether the business interest is community or separate property. A court cannot divest a party of his or her separate property interest. The income generated from the business will generally be community property, even if the underlying business is separate property. But if the compensation received by the community is inadequate, the spouse may be able to recover on a claim for reimbursement for the increased value of the separate business to the extent generated by the principal’s time, toil and talent.

Generally, capital contributions and retained earnings of a corporation or partnership are considered property of the business, and cannot be characterized as separate or community property, while a sole proprietorship does not have an existence separate from the principal.

Who Owns the Business’s Assets?

In a sole proprietorship, the business interest will consist of all the business property, minus any liabilities for the business. In a corporation, limited liability company or partnership, the “business interest” represents the right to receive a share of the profits and surpluses. Because the business property is not owned by its shareholders, members or partners, its assets are not characterized as community property or separate property. Business goodwill is an asset that belongs to the business as well.

However, if the principal has disregarded corporate formalities and used the business assets for personal purposes, the spouse may persuade the court to treat the business as the “alter ego” of the owner/spouse, like a sole proprietorship. This often results in more expensive and hostile divorces with resources being spent to track down witnesses, compel production of relevant records, and retain experts to prepare forensic accountings.

Principals who do not want to face such daunting consequences should take care to observe the formalities of the business entity, keeping business and individual property separated and ensuring that the business and its accounts are not used for personal purposes.

What Is the Value of the Business for Divorce Purposes?

Business value for divorce purposes will generally be the price at which the business would change hands between a willing buyer and a willing seller. Typically, both parties retain experts to value the business and present complex calculations to the court. The business owner must be prepared to make extensive business records available for expert inspection and know that these experts may testify in depth about the detailed bases for their opinions.

If there is a risk of proprietary or other sensitive information being disclosed, the business, as an entity, should give serious consideration to retaining its own counsel, separate from that of the owner, to minimize its exposure by insisting on written agreements to protect confidentiality and unnecessary dissemination of this information to third parties and the retention of this information by non-business personnel following the conclusion of the divorce litigation.

Are There Tax Implications?

Transfers incident to divorce may be nontaxable in most instances, but there could nonetheless be tax consequences. The principal should consult with a tax professional with questions about what may result.

So What’s the Bottom Line?

Divorce litigation is open to the public. A business principal who desires to keep business operations out of the public eye is well served by ethical counsel, discreet transparency and good faith in the discovery and negotiation process. The business principal should keep in mind that there are many more options in negotiating a division of the marital estate than are available to a court in dividing the interests of the parties in trial.

When confronting divorce, it is imperative to secure legal counsel who understands the sensitive financial, emotional and business issues involved.

Arizona Court of Appeals – Ruling Re: Order of Protection

The Arizona Court of Appeals, Division One hears case regarding ex parte order of protection and “complete unrelentless harassment” through text and e-mail messages despite procedural issues, i.e., timeliness, mootness. “Hundreds” of messages were found to have been made, and although, the messages did not specifically state that the respondent was going to “kill him”, respondent made threatening statements such as “I know where you live, I know where [petitioner’s girlfriend] works, I’m going to have the last laugh”, etc. See Cardoso v Soldo.

NG Attorney Victor Garnice recognized by Maricopa County Superior Court Family Law Judge

Nirenstein Garnice Partner Victor Garnice was recognized by a Maricopa County Superior Court Family Law Judge for his superior skills in a recent divorce case. The Court specifically stated “Both parties counsels’ have assisted them very well and have conducted this litigation in a very professional and courteous manner while continuing to be heartfelt advocates for their clients. Both are to be commended for counseling their clients against taking unreasonable positions in a case where the emotional content could have easily have tempted them to do so. It was a pleasure to have such FIRST QUALITY COUNSEL involved in this case.”

Mr. Garnice has over thirty years of experience in handling Arizona divorce cases, and is a fine example of how intelligent lawyering can advance a client’s interests in a situation that is often difficult, to say the least. Congratulations Victor!