Is Your Non-Compete Enforceable?
Employers invest time and money into their employees. To protect this investment, they often ask employees to sign non-compete and confidentiality agreements. However, an employer cannot legally enforce an agreement that unreasonably restricts their ability to make a living in his or her chosen field.
When drafting an employment agreement, it is important that it be legally enforceable. A recent court decision in Arizona provides some clarification to the idea of enforceability and will likely impact businesses across the state.
Orca Communications Unlimited, LLC, an Arizona PR company, filed suit against Ann Noder, the former president of the company, for allegedly violating her confidentiality, non-solicitation, and non-competition agreements. After negotiations to purchase the company failed, Noder resigned from her position and started her own company, Pitch Public Relations, LLC, which offered similar services. Orca filed suit soon after. The trial court dismissed Orca’s entire complaint and awarded Noder attorney’s fees. Orca then appealed. The Arizona Court of Appeals upheld the trial court’s ruling with regard to the dismissal of Orca’s breach of contract and fraud claims, but vacated the dismissal of Orca’s claims for breach of fiduciary duty, unfair competition, bad faith, and interference with business expectancies. In Orca Communications Unlimited, LLC v. Noder, the court held that the employer’s restrictive covenants were unenforceable.
The confidentiality agreement prohibited Noder from disclosing not only confidential information but also information available through “substantial searching of published literature” and information “pieced together” from a number of sources. Confidential information is entitled to protection, but information from public sources—trade journals, reference books, etc.—are not, whether or not it takes time to find or piece together the information. As a result, the court found that the agreement’s definition of confidential information was overly broad and served as an “unlimited restriction against competing with Orca.”
Similarly, the court found that the non-compete and non-solicitation covenants were too broad.
Non-compete agreements, in order to be enforceable, must be limited in time and geography. Noder’s agreement included a time limit but not a geographic limit, effectively preventing her from working in the PR industry anywhere for twelve months.
Moreover, the non-solicitation agreement applied not only to actual customers but also to potential customers. The court found the definition so far-reaching “that anyone could be included as a potential customer.” Non-solicitation agreements can only apply to customers with current ties to the business.
The court determined that the non-compete and non-solicitation agreements went beyond protecting a legitimate business interest, making them unenforceable.
If you are an employee looking to change jobs or a business owner subject to Arizona law, this case should prompt you to take a second look at your employment agreements. If you have questions about this case and what it may mean for you or your business, please feel free to call our office.