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."