Arizona Non-Compete Law

Here is the current status of the law of restrictive covenants (non-compete, non-solicit, anti-piracy, non-disclosure) in Arizona

 

“Arizona law does not look kindly upon restrictive covenants.  While the common-law principles invalidating all restrictive covenants no longer control, the law continues to disfavor such impositions on employees. See Amex Distrib. Co., Inc. v. Mascari, 150 Ariz. 510, 514, 724 P.2d 596, 600 (Ct. App. 1986). Of the various forms of restrictive covenants, those that "tend to prevent an employee from pursuing a similar vocation after termination of employment" are particularly disfavored. Id. In part because an employee is in a position of unequal bargaining power vis-a-vis his employer, such restrictive covenants are strictly construed against the employer. Id.

A restrictive covenant cannot simply squash fair competition by the former employee. Farber, 194 Ariz. at 367, 982 P.2d at 1281 (citing Bryceland v. Northey, 160 Ariz. 213, 216, 772 P.2d 36, 39 (Ct. App. 1989)). Stated differently, a covenant not to compete "is invalid unless it protects some legitimate interest beyond the employer's desire to protect itself from competition." Id. (citing Amex Distrib., 150 Ariz. at 518, 724 P.2d at 604). Legitimate interests may include protecting for some time certain types of information acquired by the employee during the course of employment and retaining the customer base. Id. at 367, 370, 982 P.2d at 1281, 1284. Conversely, a covenant cannot be used to preclude a former employee from using at a new job the skills he developed while working for the employer. Bryceland, 160 Ariz. at 217, 772 P.2d at 40.

A restraint that goes too far is unenforceable, and the validity of a restrictive covenant hinges on its reasonableness. Oliver/Pilcher Ins., Inc. v. Daniels, 148 Ariz. 530, 532, 715 P.2d 1218, 1220 (1986). A covenant is reasonable and will be enforceable only if: (1) the restraint is no greater than is necessary to protect the employer's legitimate interest; and (2) that interest is not in contravention of public policy or outweighed by the burden on the employee. Lessner Dental Labs., Inc. v. Kidney, 16 Ariz. App. 159, 161, 492 P.2d 39, 41 (1971)). To that end, to be enforceable, the covenant must be reasonable with respect to its duration, its geographic scope, and the range of employee's activities affected. See Farber, 194 Ariz. at 370-71, 982 P.2d at 1284-85. Further, any restraint on an employee's activities "must be limited to the particular specialty of the present employment." Id. at 371, 982 P.2d at 1285. The burden is on the employer to prove the extent of its protectable interests. See Compass Bank v. Hartley, 430 F. Supp. 2d 973, 979 (D. Ariz. 2006); Bryceland, 160 Ariz. at 216, 772 P.2d at 39.

Reasonableness, ultimately, is an issue of law. Farber, 194 Ariz. at 366-67, 982 P.2d at 1280-81. Generally, underpinning that issue of law is "a fact-intensive inquiry that depends on weighing the totality of the circumstances." Id. That the inquiry is usually fact-based does not, however, automatically preclude the possibility of a covenant being unreasonable on its face. See generally Heartland Sec. Corp v. Gerstenblatt, No. 99 CIV 3694 WHP, 99 CIV 3858 WHP, 2000 WL 303274, at *5-9 (S.D.N.Y. Mar. 22, 2000) (holding restrictive covenants unreasonable and thus unenforceable on a motion to dismiss).

Finally, when a covenant is deemed unreasonable, a court may "blue pencil" the covenant—strike out grammatically severable, unreasonable provisions—in order to save the covenant, if the contract so directs. Farber, 194 Ariz. at 372, 982 P.2d at 1286. However, the court need not and cannot rewrite the covenant or its provisions in order to render it enforceable. Id    

 

What are Arizona's "Anti-Deficiency" Statutes for Residential Mortgages and Why Should You Care?

If you are an Arizona homeowner, or know someone who is, you should be familiar with Arizona's "anti-deficiency" statutes.  

The anti-deficiency statutes answer this question: Can a lender who forecloses on a residential mortgage sue the former homeowner for the difference (the "deficiency") between what is owed on the home and what the home was sold for at auction?  Let's look at an example:

$250,000 owed by the homeowner at time of foreclosure LESS $150,000 received by the lender at auction EQUALS a $100,000 deficiency. Can the lender sue the homeowner for the $100,000 that remains due?

First, the most common answer: the  majority of residential foreclosures in Arizona concern Trustee’s Sales related to purchase money loans secured by deeds of trust upon single- family residences located on 2.5 acres or less. In such cases, the lender may not obtain a deficiency judgment against the borrower.

It is not always easy to determine if you qualify for protection under the statutes.   Here are Steps and Rules to help:

Do You Qualify?

STEP 1: DETERMINE WHETHER YOUR MORTGAGE LOAN IS “PURCHASE MONEY” OR “NON-PURCHASE MONEY”

• A loan is purchase money if it secures a mortgage given to secure the payment of all or part of the purchase price of the subject real property.
• A mortgage loan secured by a borrower’s residence is not purchase money if the proceeds of the loan are used to purchase a different residence such as a vacation home.
• Home equity loans that are not 80/20 loans typically are not purchase money.
• A construction loan is purchase money if the proceeds of the loan are used to build a residence and: (i) the deed of trust securing the loan covers the land and the dwelling; and (ii) the loan proceeds were in fact used to construct the residence.

STEP 2:  DETERMINE WHETHER YOUR PROPERTY IS A “QUALIFIED PROPERTY “ PROTECTED BY THE ARIZONA “ANTI-DEFICIENCY” STATUTES

•  A “Qualified Property” protected by Arizona’s “anti-deficiency” statutes means real property of 2.5 acres or less and that is limited to and utilized as a single one-family or single two- family dwelling. Real Property, regardless of its use, located on more than 2.5 acres of land is not a Qualified Property.
•  Is the property  being “utilized” as a single family dwelling?

STEP 3: DETERMINE WHICH OF THE FOUR GENERAL RULES LISTED BELOW APPLY TO YOUR LOAN

RULE #1: PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY

• Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER—the mortgage lender cannot elect the remedy to voluntarily release/waive the mortgage lien on the real property collateral and sue the borrower directly on the unsecured note.

RULE #2: PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY

• Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

RULE #3: NON-PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY

• Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

RULE #4: NON-PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY

• Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

STEP 4: CONSIDER THE “FAIR MARKET VALUE” LIMITATION OF ANY DEFICIENCY JUDGMENT OBTAINED BY THE MORTGAGE LENDER

• Any deficiency following a Trustee’s Sale or a Judicial Foreclosure permitted against either a borrower, or a guarantor, is subject to a “fair market value” limitation. In other words, the deficiency amount is calculated as the difference between the loan balance due on the date of the foreclosure sale less the greater of the foreclosure sale price or the “fair market value” of the property on the date of the sale.

Finally, a word of caution.  There are numerous exceptions to the Rules listed above, and not every example under each Step has been provided because of the complexity of circumstances that may exist in unique situations.  As with any information posted on this blog, you should consult with a competent attorney if you have questions.