I Signed a Non-Compete Agreement Several Years Ago, and Now I Want to Start My own Competing Business. Is My Former Employer’s Non-Compete Enforceable?
Arizona courts will look at several factors in determining whether the non-compete agreement you signed is binding on your ability to launch your own competing business. In particular, four specific factors will be scrutinized to ensure that a company’s non-compete agreement is not overbroad in its scope, and that it meets the basic criteria for a legally binding contract.
Legitimate Business Purpose
Non-compete agreements may not be used by businesses as generic mechanisms to indefinitely discourage or prevent current employees from becoming future rivals or joining forces with other competitors. Instead, employers need to be able to demonstrate that their non-compete agreements focus on protecting specific business interests. Trade secrets, confidential information, customer lists, proprietary formulas, devices or techniques are examples of legitimate business interests. For these interests to be considered protectable through non-compete agreements they must not be readily available to the public, and the employer must consistently protect these interests on all fronts. Furthermore, in protecting these interests, only those employees that have access to such proprietary information can reasonably be placed under restrictions of non-competition.
For example, a business that develops customized inventory management programs for big box retailers might be able to utilize a non-compete agreement to prevent employees from sharing company-developed software code, and proprietary software development strategies and protocols.
However, if these same strategies have been included, in the past, as part of a presentation at industry-specific conventions, then it would be difficult for the company to defend a position of needing to prevent employees from disclosing the same information. In order for the information to be considered publicly available, Arizona courts do not require that disclosure occur as a segment of the evening news; almost any non-protected disclosure places the information within the public domain, and demonstrates an incomplete commitment on the part of the company to protect their own proprietary interests. Arizona courts will likely be disinclined to support a company’s claim that you must remain bound to non-disclosure, or non-competition, when the company has failed to protect its own interests with the same vigilance.
An important part of a legal agreement is the element of “consideration.” Arizona courts will want to see that employees that entered into non-compete agreements also received something of value for agreeing to be bound by the terms of the agreement. If the employer requires a signed non-compete agreement in order to extend an offer of employment, then the job offer itself could possibly be considered adequate consideration.
Receiving a bonus, or a pay raise, or a promotion could also suffice as consideration, provided that the compensation was clearly tied in some way to the execution of the non-compete agreement. It’s important to look at each individual circumstance. If you signed your non-compete agreement prior to being promoted, it doesn’t automatically mean that your employer can point to the promotion as fulfilling the contractual requirement for consideration. We have to look at how the events unfolded. For example, if you were promised the promotion based your exceptional performance on the job, with no mention of the non-compete agreement, and then subsequently asked to sign a non-compete agreement, as you’re getting situated in that posh corner office, the sequence and content of events seems to indicate an absence of employee compensation related to the signing of the agreement. Every situation is different, and deserves careful review.
Reasonableness in Time and Scope
Employers may not expect the courts to uphold their non-compete agreements unless they have restricted the imposed limitations to a scope and duration that can be adequately defended as reasonable.
A local dog-walking service, with a single employee, and all clients contained within a radius of three miles, will not likely be able to convince the court that a nation-wide restriction on competition is reasonable. Likewise, this employer cannot use a non-compete agreement to prohibit its employee from future employment “working with dogs.” Even if our dog-walking employer contains his restrictions to the geography of the neighborhood, and to the business activity of walking dogs for a fee, yet one final limitation must be placed on the scope of the agreement. A reasonable period of time for which the prohibitions on competition are to remain in place, must be set forth. A dog-walking service requiring six months of noninvolvement in dog-walking, within the neighborhood of the employer, may be treated as reasonable in the courts. However, ten years is not likely to fly.
Considerations of reasonableness will vary from one industry to another. Factors such as the difficulty of acquiring new customers, and the time and investment required by a company to train their employees will be considered in evaluating reasonable time-frame restrictions. Since restrictions that extend beyond a year will be subject to more intense scrutiny in the courts, generally speaking, a non-compete agreement with a restriction of more than two or three years ago is not likely to be upheld as binding on your plans to open a competing business. A close look at the reasonableness of the geographic boundaries and activity-specific prohibitions, of the agreement you signed, may reveal that your previous employer has weakened the validity of the agreement, ironically, by making it too restrictive.
All non-competition agreements are contracts, and therefore the basic elements that are legally required for a contract to be enforceable must be in place in order for Arizona courts to even begin to consider upholding the employer’s position in such a contract. The aspect of “consideration” was briefly addressed above. Other contract law-related articles on our blog may assist you in reviewing your non-completion agreement from the perspective of the basic tenants of contract law.
Also, as a matter of public policy, Arizona Courts will look at non-competition agreements to assess their impact on the employee specifically, and on public generally.
Let’s return to our first example of the inventory management software company. We’ve noted that there may certainly be legitimate business interests that this company can protect through non-competition agreements. However, if the company were to include broad restrictions in their non-compete agreements that prohibited their software engineers from developing software for any other firms, these restrictions would likely be considered unenforceable in an Arizona court. Such sweeping provisions do not address a specific, protectable business interest. Far-reaching, generalized restraints violate the notions of reasonableness in scope. Were these types of covenants to be upheld as enforceable, they would prevent many employees from transitioning to any other employers in their field, effectively blocking them from working within their chosen profession.
In some cases, the courts may also determine that non-competition restrictions are injurious to the public. Perhaps the clearest example comes from the medical field.
Limitations imposed by a non-competition agreement on where a doctor may practice medicine or how he may treat his patients may have the unintended effect of curtailing public access to that doctor, or to the full benefits of his medical knowledge. Arizona courts tend to strongly disfavor any elements of a non-competition agreement that would harm or restrict the general public in any way, as a matter of public policy.
In summary, non-compete agreements are legal in Arizona, but do have limitations. Our courts are willing to enforce agreements that meet the basic requirements of a legal contract, do not violate public policy, protect legitimate business interests, contain restrictions that do not overreach beyond reasonable time frames, reasonable geographic protections, and reasonable prohibitions on an employee’s future activities. In our experience however, many (if not most) companies fail to protect themselves from the disfavor of the courts by attempting to overprotect themselves with excessive restrictions and covenants.
Returning to the question of starting your own competing business, it’s important to recognize that the legal issues in each situation require individualized attention. Given the chance, we would be happy to review the agreement that you signed with your previous employer, and to advocate on your behalf, to help you bring your business plan, and your knowledge, talents and skills to the marketplace. Call our Mesa business lawyers today.
1930 N. Arboleda, Suite 200
Mesa, AZ 85213