Non-Compete Step Down Provisions Part II

As mentioned in Part I, a covenant not to compete is generally enforceable as long as it is no broader in time or scope than necessary to protect an employer's legitimate business interests. The burden is on the employer to prove the extent of its protectable interests, and if it cannot, the entire covenant will be deemed unenforceable. If either the temporal or geographic scope is unreasonable, then the entire covenant is unenforceable.

In attempts to craft the most restrictive covenants that courts will enforce, employers are using "step down" provisions in covenants not to compete with increasing frequency. Before I explain step down provisions, you need to know about the "blue pencil" rule. Arizona's "blue pencil" rule empowers courts to cross out over broad, unreasonable provisions in an agreement while keeping in place less onerous, enforceable ones. Step down provisions simply provide the parties with several scenarios that may be found reasonable.

Here's an example of a step down provision I recently encountered while negotiating the terms of a client's departure from a company that he co-founded:

"Non-Competition Period" means a period of five years following the date of this Agreement, unless a court determines that that period is unenforceable under applicable law because it is too long, in which case the Non-Competition Period shall be for the longest of the following periods that the court determines is reasonable under the circumstances: four years, three years, two years, eighteen months, fifteen months, twelve months, nine months or six months.

There is no Arizona state court guidance on whether step down provisions are lawful. However, the District court in Compass Bank v. Hartley, 430 F.Supp.2d 973 (D. Ariz., 2006), stated that under the circumstances of that case: "the Court finds under limited circumstances carefully crafted that step-down provisions are a permissible application of Arizona's bluepencil rule, if they permit a Court to crossout some unreasonable sections in favor of more reasonable ones without rewriting them. Unlike Varsity Gold where the parties did not know what a reasonable provision would include, step down provisions provide the parties with several scenarios that may be found reasonable. In this sense, it affords parties an opportunity to contemplate several options at the time the contract is signed. If a court subsequently finds the covenant unreasonable and uses the step-down provision to amend the covenant, such a modification is not significant because it has already been contemplated. Thus, there was a meeting of the minds at the initiation of the contract with regard to the alternatives presented by the step-down provision. On the other hand, if the alternatives presented are indefinite and inconsistent with the underlying provision, and are not easily severable from unreasonable provisions, there is no meeting of the minds and the covenant is invalid."

Requiring Employees to Explain Health-Related Absences

Employers face challenges when managing claimed health-related absences and leave. Of course, employers have legitimate and important interests in prohibiting excessive absenteeism and abuse of sick-leave policies, and though it seems natural and obvious for employers to ask about the circumstances of a health-related absence to verify the validity of the absence, such inquiries may run afoul of the ADA (Americans with Disabilities Act) according to the recent ruling in EEOC v. Dillards.

The court's ruling in Dillards suggests that questions about an employee’s reasons for taking sick leave--unless they are carefully limited to inquiring about an employee's ability to perform his or her job duties--may be an improper inquiry into an employee’s disability.

The ADA provision at issue states:

"a covered entity shall not ... make inquiries of an employee as to whether such employee is an individual with a disability or as to the nature or severity of the disability, unless such examination or inquiry is shown to be job-related and consistent with business necessity." Nonetheless, "[a] covered entity may make inquiries into the ability of an employee to perform job-related functions." 42 U.S.C. § 12112(d)(4)(B).

In light of the Dillards case, a best practice for employers is to limit health-related inquiries to an employee’s ability to perform his or her job responsibilities.

Personal Mobile Devices at Your Job

Mobile devices are truly pervasive and many employees take them to their place of employment and use them throughout the day. Employers are struggling with how to regulate their use. This article provides employers some ideas about how to balance employees' use of these devices at work with a company's interests in protecting itself and it's proprietary information.

Non-Compete Step Down Provisions Part 1

Key employees are often asked (required) to agree to non-compete and other restrictive covenants (non-solicitation, for example) as a condition of their initial employment, or sometimes, their continued employment. Although restrictive covenants in the context of a person's employment are disfavored by the courts, they are fully enforceable if they are reasonably limited in temporal and geographic scope. On the flip side, if the restrictive covenant is missing one or the other of the limitations, or one is reasonable and the other is not...the entire agreement will be found to be unenforceable. Have an Arizona employment lawyer review the restrictive covenants you are using to determine if they are likely to be held enforceable.

What is reasonable? Context makes all the difference. A "reasonable" temporal and geographic scope is one that is no greater than necessary to protect an employer's legitimate business interests. In other words, how long does it take an employer to find, hire, train and develop a new employee to the level of the employee whose employment was terminated? That's a "reasonable" time.

Practically speaking, "reasonable" to an employer should be "as long as possible," especially when the departing employee has extensive knowledge of an industry, product, process or proprietary information. In addition, it is often difficult to estimate with any certainty how long it will take to locate and train key employees.

So, how can an employer craft enforceable restrictive covenants that provide maximum protection against competing ex-employees? In Part II, I will discuss the "blue pencil" rule, severability clauses and the concept of "step down" provisions, three key concepts a sophisticated employer should know about when creating restrictive covenants that a court will find to be enforceable.

Law School?

Yet another example of why it is better to at least attempt to pursue your 'passion' in life before trying law school. Many law school graduates are saddled with crushing debt and poor job prospects and are trying to discharge their student loans through bankruptcy.

Notably, there are positive signs with the United States economy. Let's hope it continues to increasing signs of life.

If you are struggling with business or personal debt, give an Arizona Business Lawyer a call at 480-707-2835.

Age Discrimination

The Age Discrimination in Employment Act provides remedies to individuals who are fired, forced to quit or retire, or suffer other adverse circumstances related to their employment simply because they are 40 years of age or older.

If you think you might be a victim of age discrimination, contact an Arizona Employment Lawyer to talk about your situation.

Take a look at an Age Discrimination Complaint recently filed in Arizona Federal Court.