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