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Questions
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Ken,
I always find your comments informative even if they rarely are related to Arizona. I would appreciate your insight on my predicament.
I started my company 25 years ago. During that time I have trained 3 installers who eventually became my General Manager. All 3 eventually left my company to start their own company and have taken 5-10% of my customer base each with them. They learn everything from me and the training I provide and then decide they can make more money on their own. This has cost me nearly 20% of my customer base since 1987.
AZ is a right to work state and therefore non-piracy/non-compete agreements are very expensive and difficult to enforce. Can you suggest a way that I can prevent this in the future? As a small Veteran owned business I can't afford to continue training employees who eventually leave, take my customers with them, and become competitors. Any suggestions you may have would be appreciated.
Rick. Robinson, B.S.E.T., President/CEO
QCECO, Inc.
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Ken,
I’ve used non-compete clauses in my Florida employee contracts which do not prevent the worker or salesperson from doing his job for another company, but prevents them from soliciting my company’s clients for a term of two years. I would like to increase that term to 5 years. They can go to work for my competitor but are not allowed to solicit my clients or entice any of my employees to leave my employ. Am I on solid ground?
Anon
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Ken
I read in PA law (continued employment) without a reasonable bonus, raise, etc.. is not adequate consideration to bind an existing employee to a non-compete, restrictive or privacy clause, etc...
Preferably we would like our current employees to sign an agreement based only on continued employment as the consideration. Any suggestions to remedy this?
Stuart Rosenberg ME, CET, President
Philadelphia Detection Systems Inc.
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Answer
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Restrictive covenant in agreements seek to restrict certain conduct. The restriction can be a prohibition to contact customers serviced by the employee while employed, customers in a particular area serviced by the employer, prohibiting soliciting, prohibiting servicing, prohibiting a seller from soliciting or servicing the very customers that are sold to a buyer, restricting a former employee or seller from engaging in the same business, permanently or for a particular time, etc. The terms of the restriction could be endless. Enforcing agreements with restrictive covenants is generally a matter of state law. Thus courts [either state courts or federal courts] will look to state law. State law is either by statute or case law [judicial interpretation of what the law is or should be]. If there is a statute then the enforcement of the restrictive covenant would seem easier to draft. Trying to figure out what the rules are by reading court decisions can sometimes leave much to interpretation, and this is particularly true when it comes to enforcing restrictive covenants. The reason is that restrictive covenants are generally enforceable to the extent necessary to protect the interests of the employer [or a buyer ], without unduly preventing the employee [or seller] from earning a livelihood, so as to not have a negative effect on the public [such as causing prices to rise by eliminating competition]. So it's a balancing act and the scale is tipped in favor of the employee, generally.
As an employer you should restrict your employees and former employees only in a way that is necessary for your business and not unduly burdensome to the employee. I think it's reasonable to prevent your employee from soliciting your customer whom you introduced the employee to. But even that may not be for a permanent duration. If you draft restrictions that are unreasonable [which perhaps you should read as not absolutely necessary to protect your business] then don't expect them to be enforced. Of course an employment agreement with a restrictive covenant may act as a deterrent, so that your employee is not willing to risk breaching the agreement and getting sued.
All of your employees should sign the Standard Employment Contract. If you don't have it, get it.
I had our summer intern, Jesse Kirschenbaum, [Brooklyn Law School class of 2013] do some research. I didn't want Az to feel left out, so we focused on Az, which has case law, and CA which has a statute.
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Arizona
Arizona courts tend to disfavor non-compete clauses. Usually, a valid agreement must be ancillary to another agreement and cannot be entered into for the sole purpose of restricting competition. A covenant not to compete is enforceable as long as it is not broader than necessary to protect an employer’s legitimate business interests. However, the employer bears the burden of proving the extent of its protectable interests, and if the employer cannot, then the entire covenant will be unenforceable. An Arizona court will mainly focus on the reasonableness of a provision when deciding whether it is enforceable. Factors considered by the court tend to be: the relationship of the parties to the agreement, the type of business, and whether the restrictions only protect the party attempting to restrict competition and not more people than necessary. Also considered is whether the restriction interferes with public interests or imposes undue hardship on the party being restricted. If an Arizona Court finds the restriction to be unenforceable, the court will either strike down the whole agreement or just the invalid provision and leave the rest of the agreement intact.
A restrictive covenant is reasonable and enforceable when it protects a legitimate interest of the employer, beyond the mere interest in protecting itself from competition by preventing competitive use, for a reasonable period of time. This pertains to the information or relationships which pertain peculiarly to the employer and which the employee acquired in the course of employment. In many cases, the employer may have a legitimate interest in having a reasonable amount of time to overcome the former employee’s loss, usually by hiring someone new and giving the replacement time to develop a working relationship. Restraints in non-compete clauses of employment contracts in the commercial context are reasonable in duration for the time necessary for the employer to put a new employee on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness to the customers.
In regards to the length of time a restrictive covenant can be enforced after an employee leaves, Arizona courts have consistently held two years to be unreasonable. While one year has typically been deemed reasonable, the duration requirement can fluctuate based on the particular facts of a case. As far as the scope of the covenant, 25 miles has been held reasonable. However, the geographical scope of such covenants has not been addressed in great detail by Arizona courts. Arizona courts have the power to “blue pencil” a restrictive covenant by eliminating unreasonable terms, but cannot add provisions or rewrite them.
In sum, enforcement of restrictive covenants is limited to the extent reasonably necessary to protect the employer’s best interests. An employer does have a protectable interest in maintaining customer relationships when an employee leaves. The law will guard this interest by means of a covenant not to compete for as long as may be necessary to replace the employee and give the replacement a chance to show he can do the job.
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California
In California, non-compete agreements are illegal. Business and Professions Code §16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Therefore, all agreements that preclude employment in a certain line of work are invalid in California. Furthermore, California courts have applied this rule by invalidating agreements that seek to prevent former employees from accepting work from any of the form employer’s clients.
Any covenant that prohibits a California employee from working for a competitor after termination of employment violates §16600. However, §16600 does not invalidate an employee agreement not to disclose confidential trade secrets or not to solicit customers. Thus, anti-solicitation covenants are void except where its enforcement is necessary to protect trade secrets.
An example of an agreement that was held invalid was one which prevented the employee from competing or soliciting with the employer for a period of one year and within a forty mile radius. However, the scope of such restrictive covenants are usually dependent on the particular circumstances of a given case.
To ensure that a non-compete as well as a non-solicitation clause is valid in California, it is highly recommended that the employer uses language prohibiting the employee from using or disclosing the employer’s trade secrets after they leave the company. If the covenant is written as to restrict only the actions which are necessary to protect confidential and valuable information of the company, it is hard to imagine an employee being able to attack the covenant’s enforceability.
Prepared by Jesse Kirschenbaum, Law Clerk
Kirschenbaum & Kirschenbaum
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